Question

Karl T Corp. has future receivables of 2,000,000 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. (note: you need to decide whether to use call or put option to hedge)

      Spot rate of NZ$ = $.62

      One‑year call option: Exercise price = $.59; premium = $.06

      One‑year put option: Exercise price = $.60; premium = $.04

                                                                                    U.S.    New Zealand

            One‑year deposit rate                                       9%           6%

            One‑year borrowing rate                                  11              8

                                                                                    Rate    Probability

            Forecasted spot rate of NZ$                              $.60           20%

                                                                                       .61           50%

                                                                                       .64       30%

Answer 1

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