Question 3 A team of online game software developers based in Malaysia recently secured a new job contract from Tencent, a well-known Internet based platform company, to develop e-sport game that should attract university students across the globe to play and benefit from its educational features. The contract value is USD$500,000 and to be paid in two stages - progress claim (50% to be paid when the development progress reaches halfway towards completing the job) and final claim (50%) when the job completed. The job is planned to complete and paid within 12-month period as stated in the job contract With the new job awarded, the manager of the team decided that members of the team should follow strict timelines as to complete the job on time. In any case, he is a bit concerned with the current volatility of forex market, specifically the US Dollar (USD) exchange rate movements. He is approaching you for advice to address the exchange rate exposure issue. Regarding the cash payments for the job, the first progress claim is planned to be received in 6 months from now, and the final claim is to be received in 12 months. You received the following USD exchange rates quoted by one of the panel banks: Spot rate 6-month forward rate 12-month forward rate Call option - exercise price - 6-month period Call option - premium - 6-month period Put option - exercise price - 12-month period Put option - Strike price - 12-month period MYR 4.28 4.3083 4.3111 4.3055 0.0025 4.3025 0.0025 Required, a) If use of forward contract for forex hedging, how much will the team receive the proceeds in MYR after completion of the job? (2 marks) b) If use of option contract for forex hedging, how much will the team receive the proceeds in MYR after completion of the job? (2 marks) c) Compute the 6-month forward points (2 marks) d) Advice the manager the relevant hedging strategy for him to cover the foreign exchange rate exposures given the scenario given above. Justify your advice. (4 marks) (Total= 10 marks) (TOTAL=50 MARKS) Question 3 A team of online game software developers based in Malaysia recently secured a new job contract from Tencent, a well-known Internet based platform company, to develop e-sport game that should attract university students across the globe to play and benefit from its educational features. The contract value is USD$500,000 and to be paid in two stages - progress claim (50% to be paid when the development progress reaches halfway towards completing the job) and final claim (50%) when the job completed. The job is planned to complete and paid within 12-month period as stated in the job contract With the new job awarded, the manager of the team decided that members of the team should follow strict timelines as to complete the job on time. In any case, he is a bit concerned with the current volatility of forex market, specifically the US Dollar (USD) exchange rate movements. He is approaching you for advice to address the exchange rate exposure issue. Regarding the cash payments for the job, the first progress claim is planned to be received in 6 months from now, and the final claim is to be received in 12 months. You received the following USD exchange rates quoted by one of the panel banks: Spot rate 6-month forward rate 12-month forward rate Call option - exercise price - 6-month period Call option - premium - 6-month period Put option - exercise price - 12-month period Put option - Strike price - 12-month period MYR 4.28 4.3083 4.3111 4.3055 0.0025 4.3025 0.0025 Required, a) If use of forward contract for forex hedging, how much will the team receive the proceeds in MYR after completion of the job? (2 marks) b) If use of option contract for forex hedging, how much will the team receive the proceeds in MYR after completion of the job? (2 marks) c) Compute the 6-month forward points (2 marks) d) Advice the manager the relevant hedging strategy for him to cover the foreign exchange rate exposures given the scenario given above. Justify your advice. (4 marks) (Total= 10 marks) (TOTAL=50 MARKS)
