1. Watson Bhd is a Malaysian firm that has exports of USD2,000,000 and expects to receive the...
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Question:
1. Watson Bhd is a Malaysian firm that has exports of USD2,000,000 and expects to receive the amount in one year from now. Given that, the one-year U.S. interest rate is 4% and the one-year Malaysian interest rate is 7%. Currently the spot rate of the Malaysian Ringgit against USD is RM4.25USD. Watson Bhd expects that the spot rate will be RM4.55 in one year. There is a put option available on US dollar with an exercise price of RM4.60USD and a premium of RM0.03.
a) Determine the amount of dollars that Watson Bhd will receive at the end of one year if it implements a money market hedge.
b) Determine the amount of dollars that Watson Bhd will receive at the end of one year if it implements a put option hedge.
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