Question

Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today's spot rate of the S$ is $.50, and the 180-day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days: The probability that the forward hedge will result in a higher payment than the options hedge is ____ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).

Answer 1

10%

Step-by-step explanation:

Based on the information given The PROBABILITY that the FORWARD HEDGE will tend to result in a higher payment than the OPTIONS HEDGE is 10% which indicate or means that Jones will pay the amount of $48,000 calculated as ( $.48 *$100,000) which is lower or lesser than the amount of $58,000 calculated as ( $.53 *$100,000) that was been paid with the forward hedge.