Question
Given the following information about the Malaysian ringgit (MYR): The existing spot rate of the MYR is S$0.32. The one-year forward rate of the MYR
Given the following information about the Malaysian ringgit (MYR):
The existing spot rate of the MYR is S$0.32.
The one-year forward rate of the MYR is S$0.328.
The probability distribution of the future spot rate in one year is as follows.
Future Spot Rate | Probability |
S$0.36 | 30% |
S$0.34 | 25% |
S$0.32 | 25% |
S$0.30 | 20% |
The one-year call option on MYR has an exercise price of S$0.32 and a premium of S$0.04 per unit.
The one-year put option on MYR has an exercise price of S$0.32 and a premium of S$0.03 per unit.
Assume the following one-year money market rates (annualized):
| S$ | MYR |
Deposit rate | 7% | 5% |
Borrowing rate | 8% | 6% |
Merlion Electronics Pte Ltd, a Singapore based multinational corporation, expects to receive MYR 1 million in one year.
Determine whether a forward hedge, money market hedge or a currency options hedge would be most appropriate. (10 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started