Question 5: 10 Marks

Novoair is a Bangladeshi company which expects to receive $30000 in 60 days from a company in USA. It also has $30000 in its account. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the cash flows in taka received as a result of using the following strategies.

a. Forward hedge (1)

b. Money market hedge (2)

c. Option hedge (3)

d. Which strategy is the best hedging technique for Novoair. (1)

e. Compare the most appropriate hedge to an unhedged strategy and decide whether Novoair should hedge or not. (3)

Use the following information to compute your answer.

Spot Rate Dollar	82 Taka
60-Day Forward Rate	81 Taka
60-Day Call Option	Exercise Price = 82 Taka Premium = 1 Taka
60-Day Put Option	Exercise Price = 84 Taka Premium = 2 Taka
	USD	Taka
60-Day Interest Rate (Lending)	4%	5%
60-Day Interest Rate (Borrowing)	5%	6%
	Rate	Probability
Forecasted Spot Rate of Dollar	81 Taka	25%
	83 Taka	45%
	86 Taka	30%