Final answer:
Maxi Co. can use a forward hedge, put and call options, or a money market hedge to protect against currency risk. The company must compare the forward rate, option costs, expected future spot rate, and interest rates to choose the most beneficial strategy. A detailed analysis is necessary for determining the most cost-effective and risk-minimizing approach.
Step-by-step explanation:
When Maxi Co. expects to receive S$800,000 in one year and is considering how to hedge its currency risk, it has several options: a forward hedge, using put or call option strategies, or a money market hedge. Given the one-year forward rate of the Singapore dollar is $.62, the expected future spot rate of $.67, a one-year put option with an exercise price of $.63 and a premium of $.04, and a one-year call option with an exercise price of $.60 and a premium of $.03, the company must analyze which strategy will result in the most favorable exchange rate, factoring in the cost of the hedge and the interest rates for deposits and loans in both currencies. The forward hedge seems straightforward, locking in a future exchange rate of $.62; therefore, it guarantees a certain amount of U.S. dollars for the S$800,000. A money market hedge would involve borrowing and lending in the respective currencies according to the given interest rates and also requires an analysis to ensure cost-effectiveness. The put and call options provide different types of protection and speculation opportunities depending on how Maxi Co. views the future fluctuations of the Singapore dollar against the U.S. dollar.
The steps to conduct a hedge could involve the following: analyzing current and forward exchange rates, estimating the direction of the future spot rate, calculating the potential outcomes of using options and their costs, determining the impact of interest rates through the money market approach, and finally deciding based on which strategy minimizes risk and cost while maximizing return.