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____.

Question

Quizplus · Accepted Answer

$\begin{aligned}
R C H ( 1 ) & = ( M Y R 1,500,000 \times \$ 0.20 ) - ( M Y R 1,500,000 \times \$ 0.23 ) \
& = - \$ 45,000 \
R C H ( 2 ) & = ( M Y R 1,500,000 \times \$ 0.25 ) - ( M Y R 1,500,000 \times \$ 0.23 ) \
& = \$ 30,000 \
E [ R C H ] & = ( .30 ) ( - 45,000 ) + ( .7 ) ( 30,000 ) = 7,5000
\end{aligned}$