In: Finance
Assume that Houston Co. expects to receive $1,000,000 in one year. The existing spot rate of the Singapore dollar is $.60. The one year forward rate of the Singapore dollar is $.62. Houston created a probability distribution for the future spot rate in one year as follows:
Future Spot Rate Probability
$.60 20%
.63 50
.67 30
Assume the following money market rates:
Deposit Rate US Singapore
2% 4%
4% 7%
Given this information, determine whether a forward hedge or a money market hedge would be most appropriate. Then, compare the most appropriate hedge to an unhedged strategy, and decide whether Houston should hedge its receivable positions or not