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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