Question

In: Finance

SMU Corp. will receive 1,000,000 New Zealand dollars (NZ$) in one year. It must decide whether...

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$ = $0.54

One‑year call option: Exercise price = $0.50; premium = $0.07

One‑year put option: Exercise price = $0.52; premium = $0.03

U.S. New Zealand
One‑year deposit rate 9% 6%
One‑year borrowing rate 11 8
Rate Probability
Forecasted spot rate of Z$ $0.50 20%
0.51 50
0.53 30

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

SMU Corp. has future receivables of 4,000,000 New Zealand dollars (NZ$) in one year. It must...
SMU Corp. has future receivables of 4,000,000 New Zealand dollars (NZ$) 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 = $.50; premium...
Karl T Corp. has future receivables of 2,000,000 New Zealand dollars (NZ$) in one year. It...
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)      ...
After discovering a new gold vein in the Colorado Mountains, CTC Mining Corp must decide whether...
After discovering a new gold vein in the Colorado Mountains, CTC Mining Corp must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend $900,500 for new mining equipment and pay $175,000 for its installation. The gold mined will net the firm an estimated $345,000 each year for the 5-year life of the vein....
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to...
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its current level of 0.5 to 0.55 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing $30,000,000 and converting it to New Zealand dollars (NZ$). The following table shows the short-term interest rates (annualized) in the interbank market. Currency Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) U.S....
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to...
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its current level of 0.5 to 0.55 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing $30,000,000 and converting it to New Zealand dollars (NZ$). The following table shows the short-term interest rates (annualized) in the interbank market. Currency Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) U.S....
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to...
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its current level of 0.5 to 0.55 in 30 days. Denver Financial seeks to capitalize on this potential opportunity. Suppose that Denver Financial begins by borrowing $30,000,000 and converting it to New Zealand dollars (NZ$). The following table shows the short-term interest rates (annualized) in the interbank market. Currency Lending Rate Borrowing rate (Adjusted for 30-day period) (Adjusted for 30-day period) U.S....
)(a)Suppose the MIDLAND bank expects the New Zealand dollar (NZ$) will depreciate against the US$ from...
)(a)Suppose the MIDLAND bank expects the New Zealand dollar (NZ$) will depreciate against the US$ from its spot rate of $0.43 to $0.42 in 60 days. The following interbank lending and borrowing rates exist: Currency Lending Rate Borrowing Rate US$ 7% 7.2% NZ$ 22.0% 24% Midland Bank has access to NZ$ 10million or US$ 4.3million.How can the bank attempt to make a speculative profit based on expected exchange rate movement without risking depositors money? Estimate the profit (or losses) that...
Assume that Houston Co. expects to receive $1,000,000 in one year. The existing spot rate of...
Assume that Houston Co. expects to receive $1,000,000 in one year. The existing spot rate of the Singapore dollar is $.60. The one year forward rate of the Singapore dollar is $.62. Houston created a probability distribution for the future spot rate in one year as follows: Future Spot Rate Probability $.60 20% .63 50 .67 30 Assume the following money market rates: Deposit Rate US Singapore 2% 4% 4% 7% Given this information, determine whether a forward hedge or...
Cee-ing Eye Corp. needs to decide whether to invest in research on a new drug that...
Cee-ing Eye Corp. needs to decide whether to invest in research on a new drug that would instantly and painlessly cure most eyesight problems. Investing in research on the drug is estimated to cost $6 million to be paid immediately. If it decides to invest in research, the probability of technical success is 0.46. If Cee-ing Eye Corp. has technical success, it can choose between a basic or aggressive marketing strategy. A basic marketing strategy will cost the firm $2...
#business law##accounting# Question 6: Corporate funding Alta (NZ) Ltd (Alta) is the New Zealand subsidiary of...
#business law##accounting# Question 6: Corporate funding Alta (NZ) Ltd (Alta) is the New Zealand subsidiary of a Danish company. Alta’s senior managers buy out the business from its Danish parent. The managers will retain a majority stake in Alta but will sell shares to Monica Reeves, a venture capitalist. They wish to reinvest the funds they receive from Monica back into Alta. They are prepared to assume risk but need a monthly return and want to rank above Monica on...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT