Dayana Bhd is a Malaysian exporter of computer chips. DB has agreed to deliver 200,000 units of chip at a unit price of EUR 10 to an Italian firm. Three months credit is allowed to the Italian firm before payment is due. DB may borrow short term at 2% above bank base rate or invest short at base rate either in Malaysia or Italy.

MYR/EUR Spot 4.8520 4.8590

1-month forward 4.7850 4.7920

3-month forward 4.7770 4.7840

3-month call option at a strike price of MYR4.7800

3-month put option at a strike price of MYR4.7820

3-month forecasted spot rate: MYR 4.600

Option premium: 1.5% of contract value

Weighted average cost of capital: 10%

Current bank base rate: Italy: 4% per annum Malaysia: 6% per annum

a) Calculate the foreign exchange revenues or costs via option market hedging. (9 marks)

b) If 3 months later, the spot rate is at MYR4.7650 4.7710, should you exercise the option? Explain.