The existing spot rate of the Singapore dollar is SGD/USD = 0.752. The 3-month forward rate of the Singapore dollar is SGD/USD = 0.754. The probability distribution of the future spot rate in 3 months is forecasted as follows:

Future Spot Rate SGD/USD Probability

0.736 20%

0.751 50

0.768 30

The money market interest rates are quoted in Annual Percentage Rate as below:

U.S. Singapore

Deposit rate: 0.82% 1.30%

Borrowing rate: 3.25 5.25

A 3-month put option on Singapore dollars is available, with an exercise price of SGD/USD = 0.752 and a premium of $.03 per unit. A 3-month call option on Singapore dollars is available with an exercise price of SGD/USD = 0.762 and a premium of $.01 per unit.

a. Assume that ABC Co. will need to pay 2 million Singapore dollars in 3 months. Given the above relevant information, determine whether a forward hedge, money market hedge or a currency options hedge would be most appropriate. Then compare the most appropriate hedge to an unhedged strategy and decide whether ABC Co. should hedge its receivables position. Please provide a detailed explanation of your answers.

b. Assume that XYZ Inc. expects to receive 5 million Singapore dollars in 3 months. Given the above relevant information, determine whether a forward hedge, a money market hedge or a currency options hedge would be most appropriate. Then, compare the most appropriate hedge to an unhedged strategy, and decide whether XYZ Inc. should hedge its payables position. Please provide a detailed explanation of your answers.