Intel, a US semiconductor manufacturer, has sold SGD 70 million worth of compute

Question

Intel, a US semiconductor manufacturer, has sold SGD 70 million worth of computer chips to a Singapore company. The payment (in SGD) is due in six (6) months.

Intel is given the following information:

Spot rate = SGD 1.32 / USD   

9-month forward rate = SGD 1.35 / USD

Interest rate in Singapore = 2% per year

Interest rate in U.S.A. = 3% per year

Intel’s own forecast suggests that the spot rate 6 months from now is most likely SGD 1.34 / USD.

If the firm uses the forward hedge, how much USD will it need in 6 months?

Explanation / Answer

Question specifies forward hedge for 6 month, but the forward rate is given for 9 months, assuming it is a typing mistake solution is as under

Forward Rate = $1 = SGD1.35

Therefore, SGD 1 = $1/1.35

Taking Forward contract = 70,000,000 * 1/1.35 = $51,852,000

A is correct

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