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____.
A)$0.
B)-$7,500.
C)$7,500.
D)none of the above

Question

Quizplus · Accepted Answer

With the forward hedge, Money Corp. will sell MYR1,500,000 in the forward market at the 30-day forward rate of $.23 per MYR. Therefore, the revenue from hedging will be:

MYR1,500,000 x $.23/MYR = $345,000

Without the hedge, Money Corp. will receive MYR1,500,000 and convert it at the spot rate at the end of the month, which could be either $.20 or $.25 per MYR. Therefore, the revenue from not hedging will be:

($.20 x .30 x MYR1,500,000) + ($.25 x .70 x MYR1,500,000) = $330,000

The difference between the revenue from hedging and not hedging is:

$345,000 - $330,000 = $15,000

So the revenue from hedging minus the revenue from not hedging receivables is $15,000 or $7,500 net of the cost of the hedging strategy. Therefore, the correct answer is C.