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IMPACT OF INFORMATION ON CURRENCY FUTURES AND OPTIONS PRICES Myrtle Beach Co . purchases imports that have a price of 4 0 0 , 0
IMPACT OF INFORMATION ON CURRENCY FUTURES AND OPTIONS PRICES Myrtle Beach Co purchases imports that have a price of Singapore dollars, and it has to pay for the imports in days. It can purchase a day forward contract on Singapore dollars at $ or purchase a call option contract on Singapore dollars with an exercise price of $ This morning, the spot rate of the Singapore dollar was $ At noon, the central bank of Singapore raised interest rates, while there was no change in interest rates in the United States. These actions immediately increased the degree of uncertainty surrounding the future value of the Singapore dollar over the next three months. The Singapore dollar's spot rate remained at $ throughout the day:
a Myrtle Beach Co is convinced that the Singapore dollar will definitely appreciate substantially over the next days. Would a call option hedge or a forward hedge be more appropriate given its opinion?
b Assume that Myrtle Beach Co uses a currency options contract to hedge rather than a forward contract. If the company purchased a currency call option contract at the money on Singapore dollars this afternoon, would its total US dollar cash outflows be more than, less than, or the same as the total US dollar cash outflows if it had purchased a currency call option contract at the money this morning? Explain.
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