Finance

A)

Forward Contract Hedge = S$800,000 X US$0.76

= US$608,000.

After 1 year, the forward contract hedge gives a revenue of US$608,000

B)

Amount borrowed = Principal amount + Interest Expense

Principal = 100%

Interest expense = 7%

Amount borrowed = S800,000 = 107%

Principal amount = S$800,000 / 107%

= S$747,663.55

Interest expense = S$52,336.45

Convert S$747,663.55 into US$ = S$747,663.55 X US$0.74 = US$553,271.03

Deposit US$553,271.03 into US bank = US553,271.03 X 1.09 = US$603,065.42

Using the money market hedge will give a revenue of US$603,065.42

C)

If future spot rate is US$0.75:

$ Premium fee paid

(0.04)

Profit / (loss) per unit exercising its rights on the put option (0.77 – 0.75)

0.02

Net loss (0.02)

If future spot rate is US$0.77:

$ Premium fee paid

(0.04)

Profit / (loss) per unit exercising its rights on the put option (0.77 – 0.77)

0.00

Net loss (0.04)

If future spot rate is US$0.81:

$ Premium fee paid

(0.04)

Profit / (loss) per unit exercising its rights on the put option (0.77 – 0.81)

(0.04)

Net loss (0.08)

By using the Option hedge, there will be a net loss of (US$0.02), (US$0.04) and (US$0.08) per unit if

exercise at future spot rate of US$0.75, US$0.77 and US$0.81 respectively

D)