Assume that Carbondale Co. expects to make a payment S$500,000 in one year. The existing spot rate of the Singapore dollar is $.60. The one year forward rate of the Singapore dollar is $.63. Carbondale created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate Probability

$.61 20%

.63 50%

.67 30%

Assume that one year put options on Singapore dollars are available, with an exercise price of $.59 and a premium of $.02 per unit. One year call options on Singapore dollars are available with an exercise price of $.63 and a premium of $.02 per unit.

Assume the following money market rates:

U.S. Singapore

Deposit rate 8% 5%

Borrowing rate 9% 6%

1. What is the dollar amount needed in one year with forward hedge?

a.311,428 b.315,000 c.323,000 d.319,000

2. What is the expected dollar amount needed in one year with currency option hedge?

a.311,428 b. 315,000 c. 323,000 d. 319,000

3. What is the dollar amount needed in one year with money market hedge?

a.311,428 b. 315,000 c. 323,000 d. 319,000

4. What is the expected dollar amount needed in one year without hedge?

a.311,428 b. 315,000 c. 323,000 d. 319,000

5. Will the firm choose to hedge? If yes, what is the optimal hedge strategy?

a. Yes, forward hedge b. Yes, money market hedge c. Yes, option hedge d. no