I think there are three opinions that are in play; the customer's, the artist's, and the framer's. The customer usually has opinions about how they want their art to look on their walls. While the artist may not be available to ask, you can sometimes infer their intentions based on choices they've made in the creation of their art, and then there's your expert opinion.
I don't know if there's a customer in this situation so I'll ignore that.
The artist masked their edges so that could imply that it was their intention to display the image in full, including the edges. The smudge looks like a mistake that the artist may not want to show. The signature, being in the margin rather than within the image, implies to me that the artist wants some white border to show. The signature comes close but is not directly on the edge of the paper. The artist left a little bit of room to allow for an overmat that covers the outer edge of the paper. I don't know that the artist would have put pin holes in the corners of the paper had they intended them to show. I would say that the artist intended an overmat with some white margin all the way around the image but may be fine with covering the white due to their smudge.
As professionals who see a lot of stuff framed all of the time, we have our own personal aesthetic preferences. The benefit of floating this piece would be that you'd avoid the annoying visual you get with a wavy paper against the straight beveled line of the window mat. You can also lessen this effect with a slight mat lift. One bad thing about a float with this particular piece is that it may end up looking more like a sketch torn from a sketchbook rather than a finished piece of art. If you choose to overmat instead of float, you probably have your own opinions of what looks better in regards to the margin. Your options are to come in just over the edge of the paper, exposing the signature but covering the pinholes, to show a small amount of the white margin around the image but cover the signature, or to show no white margin and have the mat come in just over the edges of the image.
The art's value might affect my personal choice. Even with a UV filtering glazing, light damage can occur (it just takes longer). Watercolor pigments are pretty light fugitive and if you come in over the edge of the image, the exposed image may fade a little over the course of the next 20-50 years but the area covered by the mat will not. If future owners of this piece wish to change the framing, you will have limited their options. Similarly, if you show just a small amount of the white margin and cover the signature with the mat, the exposed margin may be affected by light while the covered section of the margin would not and future owners would not be able to expose the signature without seeing the line of the previous mat. So...if this is a piece of significant personal or monetary value that future generations may also value, this may affect what I chose to cover with the mat.
If I was framing this for myself and no other opinions were important, I'd probably want to show every square inch of the painting so I'd overmat the paper, covering the signature but leaving a very minimal margin (depending on how straight that border is). If I was framing it for a gallery or for any other type of public display, I'd overmat the paper, exposing the signature and some of the white margin all the way around.