International Finance Examples: Derivative Options Numerical Solving Techniques

Solution 1

Initial Data

The initial data to carry out analysis is as given below:-

Initial Data    
Amount expected to receive 500000 S$
Time 1 Years
Existing Spot Rate 0.6  

 

Calculation & Analysis

Forward Hedge Strategy

The forward hedge strategy clearly shows there will be loss of 9000 due to hedge as given below:-

Forward Hedge Strategy  
Forward rate 0.62
Future Spot Rate Probability
0.61 20%
0.63 50%
0.67 30%
   
Expected future spot rate 0.638
Amount in US Dollar to be received in case of hedge 310000
Amount in US Dollar to be received without hedge 319000
Loss due to hedge -9000

 

Options Strategy

The options hedge strategy clearly shows there will be loss of 20000 due to put hedge but there will be gain of 4000 in case of call option hedge as per analysis given below :-

Options Strategy    
  Put Call
Exercise Price 0.63 0.6
Premium 0.04 0.03
     
Expected future spot rate 0.638  
Loss in case of put option hedge -20000  
Gain in case of Call option hedge 4000  

 

Money Market Strategy

The Money Market strategy clearly shows there will be loss of -14140 USD due to hedge as given below:-

Money Market Strategy    
  US Singapore
Deposit Rate 8% 5%
Borrowing rate 9% 6%
     
Borrowing amount 500000 S$
Interest Rate 6%  
Deposit in USD 300000  
Deposit Rate 8%  
Amount after 1 year 324000  
Amount in S$ 507837  
Amount to be paid in S$ 530000  
Loss due to Hedging -22163 S$
Loss in USD -14140 USD

 

Result

 

The analysis clearly says that there will be loss compare to unhedged strategy in case of Forward, Put and Money market strategy but there will be gain in case of Call strategy. So Call strategy is best amongst all and also better compared to unhedged position.

Solution 2

Initial Data

 

The initial data to carry out analysis is as given below:-

Initial Data    
Amount expected to receive 1000000 Euros
Time 1 Years
Existing Spot Rate 1.25  
Expected spot rate 1.3  

 

Calculation & Analysis

b) Options Strategy

 

The options hedge strategy clearly shows there will be loss of 25000 and cash flow in USD will be 1327000 due to put hedge as per calculation done by finance assignment help experts from UK:-

Options Strategy    
  Put  
Exercise Price 1.32  
Premium 0.04  
     
Expected future spot rate 1.3  
Loss in case of put option hedge -25000 USD
Cash flow in USD 1275000 USD

 

a)     Money Market Strategy

 

The Money Market strategy clearly shows there will be gain of 27000 USD due to hedge as given below. The cash flow in this case will be 132700 USD as per calculation done by our international corporate finance assignment help problem solvers.

Money Market Strategy    
  US Eurozone
Deposit Rate 3% 4%
Borrowing rate 6% 7%
     
Borrowing amount 1250000 Dollar
Interest Rate 6%  
Deposit in Euro 1000000  
Deposit Rate 4%  
Amount after 1 year 1040000 Euros
Amount in USD 1352000 Dollar
Amount to be paid in S$ 1325000  
Gain due to Hedging 27000 USD
Cash flow in dollar 1327000 USD

 

c)Result

 

The analysis clearly says that there will be loss in case of option strategy but there will be gain in case of money hedge strategy. So money hedge strategy is best suited in this case.

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