Question

SMU Corp. will receive 1,000,000 New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by determining the estimate (or probability distribution) of dollar revenue to be received in one year for each type of hedge.

Spot rate of NZ$ = $.54

One‑year call option: Exercise price = $.50; premium = $.07

One‑year put option: Exercise price = $.52; premium = $.03

U.S. New Zealand

One‑year deposit rate   9% 6%

One‑year borrowing rate    11 8

Rate Probability

Forecasted spot rate of Z$ $.50 20%

  .51 50

  .53 30

Answer 1

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