1. Assume that Carbondale Co. expects to pay SGD500,000 in one year. The existing spot rate of the Singapore dollar is USD/SGD .60. The one year forward rate of the Singapore dollar is USD/SGD .62.

Assume that one year put options on Singapore dollars are available, with an exercise price of USD/SGD .63 and a premium of USD/SGD .04. One year call options on Singapore dollars are available with an exercise price of USD/SGD .60 and a premium of USD/SGD .03.

Assume the following money market rates and the probability distribution for the future spot rate in one year shown in the table below.

Given this information, determine whether a forward hedge, money market hedge, or a currency options hedge would be most appropriate. Then compare the most appropriate hedge to an unhedged strategy, and decide whether Carbondale should hedge its position. Please explain your decision.