Question
Assume that Brian Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Todays spot rate of the S$ is $.50, and the
Assume that Brian Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Todays spot rate of the S$ is $.50, and the 180day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180day expiration date. Brian has developed the following probability distribution for the spot rate in 180 days:
Possible Spot Rate
in 180 Days Probability
$.48 10%
$.53 60%
$.55 30%
The probability that the forward hedge will result in a higher payment than the options hedge is _______ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).
| 0% |
| 10% |
| 30% |
| 70% |
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