Question

Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,600,000. The 30-day forward rate is $0.23. Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $0.20 and $0.25, with probabilities of 40% and 60%, respectively. Calculate the revenue from hedging minus the revenue from not hedging receivables.

Answer 1

Malaysian ringgit at the end of next month are $0.20 and $0.25

The 30-day forward rate is $0.23.

We have to calculate the revenue from hedging minus the revenue from not hedging receivables.

Revenue 1 based on when Malaysian ringgit at the end of next month are $0.20,

= MYR ( 1600000 * 0.20 - 1600000 * 0.23)

= - MYR 48000

Revenue 2 based on when Malaysian ringgit at the end of next month are $0.25,

= MYR ( 1600000 * 0.25 - 1600000 * 0.23)

= MYR 32000

The required expected revenue = Probablility 1 * revenue 1 + Probablility 2 * revenue 2

= ( 0.4 * - 48000) + ( 0.6 * 32000)

= 0

The answer is 0 MYR