Compare the most appropriate hedge to an unhedged strategy

Assignment Help Financial Management

Reference no: EM13935853

Comparison of techniques for hedging receivables.

a. Assume that Carbondale Ltd expects to receive S$500 000 in one year. The existing spot rate of the Singapore dollar is £0.40. The one-year for- ward rate of the Singapore dollar is £0.41. Car- bondale created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate	Probability
£0.41	20%
0.43	50
0.47	30

Assume that one-year put options on Singapore dollars are available, with an exercise price of £0.40 and a premium of £0.025 per unit. One-year call options on Singapore dollars are available with an exercise price of £0.39 and a premium of £0.02 per unit. Assume the following money market rates:

Spot rate of NZ$	£0.36
One-year call option	Exercise price 5 £0.33; premium 5 £0.046
One-year put option	Exercise price 5 £0.35; premium 5 £0.02
	Rate	Probability
Forecasted spot rate of NZ$	£0.33	20%
	0.34	50
	0.35	30

	UK	Singapore
Deposit rate	8%	5%
Borrowing rate	9	6

Given this 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 Carbondale should hedge its receivables position.

b. Assume that Black Rod plc expects to need S$1 million in one year. Using any relevant information in part (a) of this question, 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 Black Rod should hedge its payables position.

Reference no: EM13935853

Questions Cloud

Descriptor describes a memory segment : The above segment descriptor describes a memory segment in terms of its start address, its size and whether it is ALLOCATED or FREE. This descriptor is part of a list (contains a pointer to next segment descriptor). Initially, there is only one se..

Leadership styles in management : Research the many leadership styles in management. Select one style and write a report that describes the positive and negative attributes of the leadership style and how you identify with it.

How can you prevent or slow down the spread : Describe 1-2 of the things that people do (you can include individuals, doctors, health care professionals, hospitals, farmers, etc.) that contribute to this problem? Why?

Calculate estimated break-even point in annual unit sales : Martinez Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. Calculate the estimated break-even point in annual unit sales of the new product if Marti..

Compare the most appropriate hedge to an unhedged strategy : Then, compare the most appropriate hedge to an unhedged strategy, and decide whether Black Rod should hedge its payables position.

Create a new excel 2013 spreadsheet : Create a new Excel 2013 spreadsheet, name it "Excel 2013 project 3" and follow these steps to include the following:

Based on the limited information available : Note that under kill costing, the company is showing a substantial loss in 2011. Based on the limited information available, does it appear that the company should get out of the tractor business?

Discuss metabolic requirements for growth of each microbe : Discuss the metabolic requirements for growth of each microbe and select one antibiotic (bacteria), antiviral (virus) or anti-fungal (fungi) agent, depending on the pathogens that you selected.

Discuss the role of the immune system in protecting the body : Discuss the role of the immune system in protecting the body from the pathogenic and non-pathogenic microbes selected in Module 1 and 2.

User Account

All Pages