International Finance: Evaluating Hedging Strategies for Pomo Limited

This assignment focuses on international finance and hedging strategies, specifically analyzing the case of Pomo Limited. It calculates the values of forward contract, money market, and option hedges, comparing their effectiveness in mitigating currency risk. The analysis includes detailed calculations for each hedging method, considering factors like forward rates, interest expenses, spot rates, and option premiums. Furthermore, the assignment briefly discusses the optimal hedge against a no-hedge position, recommending forward contract hedging as the most advantageous. It also explores financial hedging in general, outlining its advantages, disadvantages, and recommending alternative methods like operational hedging and cross-hedging. The assignment references several academic sources to support its findings and recommendations, providing a comprehensive overview of hedging techniques in international finance.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
a. Calculating the forward contract hedge value for Pomo Limited:.............................2
b. Calculating the money market hedge for Pomo Limited:.........................................2
c. Calculating the Option hedge value for Pomo Limited:............................................3
d. Briefly discussing about the optimal hedge against the no hedge position of the
company:......................................................................................................................5
e. Financial hedging:.....................................................................................................6
Reference and Bibliography:........................................................................................8

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a. Calculating the forward contract hedge value for Pomo Limited:
Particulars Value
Payment in SGD received by Pomo Ltd (A) SGD 800,000.00
Forward rate (B) $ 0.76
Conversion Amount after one year
(C=A*B) $ 608,000.00
Payment in SGD received by Pomo Ltd (A) = SGD 800,000.00
Forward rate (B) = $0.76
Conversion Amount after one year = $ 0.76 * SGD 800,000.00
Conversion Amount after one year = $ 608,000.00
b. Calculating the money market hedge for Pomo Limited:
Process
1
Payment Received in SGD = SGD 800,000.00
Interest Expenses = 7%
Total Amount of money borrowed in S$ = SGD 800,000.00 * (1+7%)
Total Amount of money borrowed in S$ = SGD 747,663.55
Process
2
Total Amount of money borrowed in S$ = SGD 747,663.55
Current Sport Rate = $0.74
Converted amount in USD = SGD 747,663.55 * $0.74
Converted amount in USD = $ 553,271.03
Process
3
Converted amount in USD = $ 553,271.03
Depositing rate in US = 9%
Interest received after 1 year = $ 553,271.03 * (1+9%)
Interest received after 1 year = $49,794.39
Amount received after capital and interest in 1 year = $49,794.39 + $
553,271.03
Amount received after capital and interest in 1 year = $ 603,065.42

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c. Calculating the Option hedge value for Pomo Limited:
Payment Received in SGD = SGD 800,000.00
One year put option exercise price = $0.77
Premium = $0.04
Net receipt from put option = (SGD 800,000.00 * $0.77) – (SGD 800,000.00 *
$0.04)
Net receipt from put option = $616,000 - $32,000
Net receipt from put option = $584,000
Future spot rate Probability
$
0.75 20%
$
0.77 50%
$
0.81 30%
Predictive future spot rate (0.75*20%) + (0.77*50%) + (0.81*30%)
Predictive future spot rate $ 0.778
Payment Received in SGD SGD 800,000.00
After maturity of 1 year put SGD 800,000.00 * $0.778
After maturity of 1 year put $ 622,400.00
Premium Amount $0.04
Premium Amount SGD 800,000.00 * $0.04
Premium Amount $ 32,000
Value of Put $ 622,400.00 - $32,000
Value of Put $ 590,400.00
Particulars Value
Payment Received in SGD SGD 800,000.00
Put Value after 1 year $ 0.075
After maturity of 1 year put SGD 800,000.00 * $0.75
After maturity of 1 year put $ 600,000.00

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Premium Amount $0.04
Premium Amount SGD 800,000.00 * $0.04
Premium Amount $ 32,000
Exercise price $ 0.077
Profit from put option $ 0.077 - $ 0.075
Profit from put option $ 0 02
Profit from put option in
Amount $ 0.02 * SGD 800,000.00
Profit from put option in
Amount $ 16,000
Value of Put
$ 600,000.00 - $32,000 +
$16000
Value of Put $ 584,000.00
Particulars Value
Payment Received in SGD SGD 800,000.00
Put Value after 1 year $ 0.077
After maturity of 1 year put SGD 800,000.00 * $0.77
After maturity of 1 year put $ 616,000.00
Premium Amount $0.04
Premium Amount SGD 800,000.00 * $0.04
Premium Amount $ 32,000
Exercise price $ 0.077
Value of Put $ 616,000.00 - $32,000
Value of Put $ 584,000.00
Particulars Value
Payment Received in SGD SGD 800,000.00
Put Value after 1 year $ 0.081
After maturity of 1 year put SGD 800,000.00 * $0.81
After maturity of 1 year put $ 648,000.00
Premium Amount $0.04
Premium Amount SGD 800,000.00 * $0.04
Premium Amount $ 32,000
Value of Put $ 648,000.00 - $32,000 - $16000
Value of Put $ 616,000.00
The above table directly indicates the overall option hedge for Pomo Limited,
which can eventually help in improving the level of converted payments in

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SGD/USD. The future sport rate is also detected to understand the level of converted
amount that can be used by the organisation to determine the converted price after
one year. The options method relevantly uses premiums that can complete the
option trade. Therefore, from the option trade the overall converted value will be at
the levels of $584,000. Buchardt and Moller (2018) stated that option hedging
strategy is mainly used for reducing the risk of currency conversion and take low
capital for conducting the relevant hedges. In this context. Gueant and Pu (2017)
further mentioned that with the help of money market hedge companies are mainly
able to reduce the level of risk involved in currency conversion.
d. Briefly discussing about the optimal hedge against the no hedge position of
the company:
Particulars Value
Forward contract
hedge $ 608,000.00
Money market hedge $ 603,065.42
Option market hedge $ 584,000.00
The evaluation of above table directly indicates that the alternative hedging
option that can be conducted for Pomo Limited is the forward contract hedge, as it
has the lowest level of loss in currency conversion as compared to other forms of
hedging contract. From the relevant evaluation of the above table it can be detected
that the forward contact hedge will provide the highest level of conversion values of
$608,000 after one year, which is not possible in other conversion options. The
money market hedge will only provide the conversion value of $603,065.42, while
the options market will provide $584,000 after one-year period. Hidalgo, Pigolotti and
Munoz (2015) mentioned that with the detection of adequate hedging process

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companies are mainly able to reduce the losses, which are incurred during the
currency conversion and maintaining the level of income that can be generated from
investment. The no hedge position of the company will directly raise relevant
concerns, as the company will incur abnormal risk from the no hedge conversion
method. Liang and Li (2015) argued that forward contract hedge relevantly has
higher expenses in comparison to money market hedge and option hedge.
e. Financial hedging:
Introduction:
Financial hedging is mainly considered an adequate measure, which can
reduce the financial risk of companies. In addition, companies using the financial
hedging measure is mainly able to minimise the level risk and maximise the returns
from currency conversion.
Advantages:
There is specific advantage of financial hedging measures that can be used
by the organisation to generate high level of income from their operations. With the
presence of financial hedging organisation are able to reduce the risk from currency
market. The financial hedging can be conducted immediately with relevant low cost,
which reduces risk of currency exposure of the organisation. Ning and You (2017)
mentioned that with the rising risk can be reduced by conducting adequate hedging
measure, as it helps in curbing the losses from depreciating currency values.
Disadvantages:
The major concern for the hedging process is the over hedge, which can be
conducted by companies. The over-hedging process might negatively increase the

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risk exposure of the organisation, which might hamper their financial position. The
over-hedging process only occurs when the company does not conduct adequate
research in their currency exposure. The major limitation of the financial hedging is
its incapability to hedge against long-term, real exposure with the financial contracts.
Moreover, the financial hedging process is relevantly considered costly, time-
consuming, and not easily revisable for the organisation. Thus, the organisation will
not adequate reduce the total risk from investment if adequate research is not being
conducted by the companies (Ning & You, 2017).
Recommendation of alternative method:
Th recommended alternative method that needs to be conducted by the
organisation are operational hedging, leading and lagging, cross hedging, and
currency diversification. The organisation with the help of cross hedging can
adequately reduce the risk level, while reducing the total risk from investment. the
use of cross hedging measure might adequately allow the organisation to generate
high level of income from investment, while reducing the total risk from investment.
The cross-hedging measure might adequately support the risk mitigation of Pomo
limited, which can eventually improve the level of currency conversion value.
Conclusion:
From the relevant evaluation it can be detected that other forms of hedging
process might directly have negative impact on currency conversion of the company,
while cross hedging can help in reducing the conversion loss. There is significant
advantages and disadvantages of financial hedging measure, which can help in
improving the level of revenues from currency conversion. The disadvantage of the
financial hedging process can be reduced with the help of recommended hedging

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process such as operational hedging, leading and lagging, cross hedging, and
currency diversification.

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Reference and Bibliography:
Bonetti, D., Leão, D., Ohashi, A., & Siqueira, V. (2015). A general multidimensional
Monte Carlo approach for dynamic hedging under stochastic
volatility. International Journal of Stochastic Analysis, 2015.
Buchardt, K., & Møller, T. (2018). Hedging and Cash Flows in the Presence of Taxes
and Expenses in Life and Pension Insurance. Risks, 6(3), 68.
Guéant, O., & Pu, J. (2017). Option pricing and hedging with execution costs and
market impact. Mathematical Finance, 27(3), 803-831.
Hidalgo, J., Pigolotti, S., & Munoz, M. A. (2015). Stochasticity enhances the gaining
of bet-hedging strategies in contact-process-like dynamics. Physical Review
E, 91(3), 032114.
Hussain, S., Zeb, S., Saleem, M. S., & Rehman, N. (2018). Hedging Error Estimate
of the American Put Option Problem in Jump-Diffusion
Processes. FILOMAT, 32(8).
Liang, C., & Li, S. (2015). Option pricing and hedging in incomplete market driven by
Normal Tempered Stable process with stochastic volatility. Journal of
mathematical Analysis and Applications, 423(1), 701-719.
Ning, C., & You, F. (2017). Hedging Against Uncertainty in Process Planning: A
Data-Driven Adaptive Nested Robust Optimization Approach. In Computer
Aided Chemical Engineering (Vol. 40, pp. 1345-1350). Elsevier.

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Ning, C., & You, F. (2017). Hedging Against Uncertainty in Process Planning: A
Data-Driven Adaptive Nested Robust Optimization Approach. In Computer
Aided Chemical Engineering (Vol. 40, pp. 1345-1350). Elsevier.