Discuss whether the multi-national corporation (MNC) like Pomo Limited will risk be over-hedged its position
Assume that one-year put options on Singapore dollars are available, with an exercise price of US$0.77 and a premium of US$0.04 per unit. One-year call options on Singapore dollars are available with an exercise price of US$0.74 and a premium of US$0.03 per unit. Assume the following money market rates:
US Singapore
Deposit rate 9% 6%
Borrowing rate 10% 7%
Given this information, determine whether a forward hedge, money market hedge, or a currency option hedge (explain which option is correct) would be most appropriate. Then compare the most appropriate hedge to an unhedged strategy, and decide whether Pomo Limited should hedge its receivables position. (Explain why forward buy what currency & sell what currency)
a: Calculate the forward contract hedge.
b. Calculate the money market hedge.
c: Calculate the option hedge.
d: Briefly discuss the optimal hedge against the no hedge position of the company.
e: Discuss whether the multi-national corporation (MNC) like Pomo Limited will risk be over-hedged its position to the extent affect the company’s financial position.
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