Cleveland Inc., an Australian company, is expecting to receive MYR200,000 from a Malaysian company as a settlement of an export shipment. The Australian company allows its customers six months to settle their accounts. Depending on their needs, Cleveland can either borrow or deposit both in Australian dollars (AUD) and  Malaysian ringgit (MYR).

 

The current spot rate and the six months forward rate of Malaysian ringgit (MYR) are AUD0.2956/MYR and AUD0.2934/MYR respectively.

The current annual lending rates are 4.20% in Australia and 6% in Malaysia.

The annual deposit rates are 2.40% in Australia and 3.5% in Malaysia.

Cleveland can also purchase either a six-month call option which offers a strike rate of AUD0.2927/MYR with a premium of AUD0.05 or a six-month put option which offers a strike rate of AUD0.3180/MYR  with a premium of AUD0.06.          

Forecasted foreign exchange rates for MYR in AUD in six months under three different scenarios are given below.

Forecast	Probability
AUD0.3240	30%
AUD0.2950	50%
AUD0.2883	20%

You are required 
 

1. You are required to estimate the cash flow positions of Cleveland under not-hedge, forward hedge, money market hedge (3 Points) and option hedge, and to select the best alternative course of action 
2. Explain how the call option contracts can be used to hedge the MYR receivables  (explain, calculations are not required). 

Answer rating: 100% (QA)

To estimate the cash flow positions of Cleveland under different hedge scenarios lets analyze each approach 1 No Hedge NotHedge Under the nothedge sce... View the full answer