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:
$$\begin{array}{l}
\text { Passible spot Fate }\
\begin{array} { c c }
\text { in 90 D.4. } & \text { Probrailit } \
\$ 48 & 10 \% \
\$53 & 60 \% \
\$.55 & 30 \%
\end{array}
\end{array}$$
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).

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:
$$\begin{array}{l}
\text { Passible spot Fate }\
\begin{array} { c c } 
\text { in 90 D.4. } & \text { Probrailit } \
\$ 48 & 10 \% \
\$53 & 60 \% \
\$.55 & 30 \%
\end{array}
\end{array}$$
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).

Quizplus · Accepted Answer

The Answer of 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:
$$\begin{array}{l}
\text { Passible spot Fate }\
\begin{array} { c c } 
\text { in 90 D.4. } & \text { Probrailit } \
\$ 48 & 10 \% \
\$53 & 60 \% \
\$.55 & 30 \%
\end{array}
\end{array}$$
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).

Assume That Jones Co The Probability That the Forward Hedge Will Result in a Dollars