Malaysia Airlines Berhad of Malaysia has just signed a contract to source two vessels of oil and gas products from ExxonMobil Limited of Thailand. The contract involved an amount of 2.8 million in Thai Baht (THB) for each vessel, payable in six months. Due to the high volatility in global foreign exchange markets, both companies are concerned with their respective exposures to uncertainties. Assume 360 days a year and available information is as follows:

Exchange Rate (MYR/THB)

1-month forward 7.4600 7.5500

Forward Points

1-month forward 300 - 500

3-month forward 200 - 400

6-month forward 250 - 300

180-days Money Market (%)

Malaysia 2 4

Thailand 1 2

Option Market 6-month Call option on THB

Exercise Price MYR8.0000

Premium 2%

Option Market 6-month Put option on THB

Exercise Price MYR9.4000

Premium 1.6%

Required:

(a) Determine the current spot exchange rates and the six months forward outright quotes. (4 marks)

(b) Devise a hedge strategy to the importer with forward and determine the hedged value. (4 marks)

(c) Devise a hedge strategy to the importer with money market and determine the hedged value. (7 marks)

(d) Devise a hedge strategy to importer with the available options and determine the hedged value given that the importer strongly believes in forward rate as an unbiased predictor and the importer has surplus of cash. (8 marks)

(e) Which is the best hedging strategy to be considered by the importer? Why? (2 marks)

(f) Discuss the impact on the decision made in subsection (e) above, if Interest Rate Parity (IRP) holds between the two countries. (5 marks)