Question
Assume that Treasury Wine, an Australian MNC, expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is A$0.98. The
Assume that Treasury Wine, an Australian MNC, expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is A$0.98. The oneyear forward rate of the Singapore dollar is A$1.02. There is a 50% chance that the one-year spot rate is A$1.01, and a 50% chance that the one-year spot rate is A$1.05.
Also assume that oneyear put options on Singapore dollars are available, with an exercise price of A$1.03 and a premium of A$0.02 per unit. Assume the following money market rates:
Australia Singapore
Deposit rate 2% 3%
Borrowing rate 5% 6%
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 Treasury Wine should hedge its receivables position.
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