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 MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is how much?

Answer 1

spot rate in 30 days = probability*expected value = 0.30*$.20 + 0.70*$.25 = $0.06 + $0.175‬ = $0.235‬

revenue from hedging = receivables*forward rate = MYR1,500,000*$.23 = $345,000

revenue from not hedging receivables = receivables*spot rate in 30 days = MYR1,500,000*$0.235 = $352,500‬

difference = revenue from hedging - revenue from not hedging receivables = $345,000 - $352,500 = -$7,500

revenue from hedging minus the revenue from not hedging receivables is -$7,500.