Cleveland Inc., a Malaysian company, is expecting to pay AUD200,000 to an Australian company based in Melbourne as a settlement of an import shipment. The Australian company is allowed six months to settle their accounts. Depending on their needs, Cleveland, Inc can either borrow or deposit in both the Australian dollar (AUD) or Malaysian ringgit (MYR).

The current spot rate and the forward rate in six-month for the Australian dollar (AUD) are MYR3.3835/AUD and MYR3.4085/AUD respectively.

The current annual lending rates are 4.20% in Australia and 6% in Malaysia.

The annual deposits rates are 2.40% in Australia and 3.5% in Malaysia.

Cleveland can also purchase either a six-month call option which offers strike rate of MYR3.4170/AUD with a premium of MYR0.10 or a six-month put option which offers strike rate of MYR3.4150/AUD with a premium of MYR0.15.

Forecasted foreign exchange rates in six months under three different scenarios are given below.

Forecast

Probability

MYR3.3739/AUD

30%

MYR3.4250/AUD

50%

MYR3.4690/AUD

20%

You are required to estimate the cash flow positions of Cleveland under not-hedge , forward hedge, money market hedge and option hedge and to select the best alternative course of action.