1. Assume that Carbondale Co. expects to receive S$700,000 in one year. The existing spot rate of the Singapore dollar is $0.60. The one-year forward rate of the Singapore dollar is $0.64. Carbondale created a probability distribution for the future spot rate in one year as follows:

   FUTURE SPOT RATE		PROBABILITY
   $0.62		20	%
   0.66		50
   0.70		30

   Assume that one-year put options on Singapore dollars are available, with an exercise price of $0.66 and a premium of $0.05 per unit. One-year call options on Singapore dollars are available with an exercise price of $0.60 and a premium of $0.04 per unit. Assume the following money market rates:

   	U.S.		SINGAPORE
   Deposit rate	8	%	4	%
   Borrowing rate	10		5

   Given this information, determine whether a forward hedge, a 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 receivables position. Do not round intermediate calculations. Round your answers to the nearest dollar.

   		Total Amount Received
   Forward hedge		$
   Money market hedge		$

   		Total Amount Received
   Possible spot rate	Probability	Put option hedge	No hedge
   $0.62	20%	$	$
   $0.66	50%	$	$
   $0.70	30%	$	$

   Choose the correct statement.

   1. The forward hedge is superior to the money market hedge and has a 70% chance of outperforming the put option hedge. Therefore, the forward hedge is the optimal hedge. When comparing the optimal hedge (the forward hedge) to no hedge, the unhedged strategy has an 80% chance of outperforming the forward hedge. Therefore, the firm may desire to remain unhedged.
   2. The money market hedge is superior to the forward hedge and has a 70% chance of outperforming the put option hedge. Therefore, the money market hedge is the optimal hedge. When comparing the optimal hedge (the money market hedge) to no hedge, the unhedged strategy has an 80% chance of outperforming the money market hedge. Therefore, the firm may desire to remain unhedged.
   3. The put option hedge is superior to the forward hedge and money market hedge. The optimal hedge (the put option hedge) is preferable to the unhedged strategy because there is a 70 percent chance that it will outperform the unhedged strategy.

   -Select- I, II, or III

2. Assume that Baton Rouge, Inc., expects to need S$3 million in one year. Using any relevant information in part (a) of this question, determine whether a forward hedge, a 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 Baton Rouge should hedge its payables position. Do not round intermediate calculations. Round your answers to the nearest dollar.

   		Total Amount Paid
   Forward hedge		$
   Money market hedge		$

   		Total Amount Paid
   Possible spot rate	Probability	Call option hedge	No hedge
   $0.62	20%	$	$
   $0.66	50%	$	$
   $0.70	30%	$	$

   Choose the correct statement.

   1. The optimal hedge is the call option hedge. When comparing the optimal hedge (the call option hedge) to no hedge, the unhedged strategy has a 70% chance of outperforming the call option hedge. Therefore, the firm may desire to remain unhedged.
   2. The optimal hedge is the money market hedge. The money market hedge is preferable to the unhedged strategy because there is an 80 percent chance that it will outperform the unhedged strategy.
   3. The optimal hedge is the forward hedge. The forward hedge is preferable to the unhedged strategy because there is an 80 percent chance that it will outperform the unhedged strategy.

   -Select-I, II, or III