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problem: SMU Corp. has future receivables of 4,000,000 New Zealand dollars [NZ dollars] in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following data to make the decision. Confirm your answer by determining the estimate [or probability distribution] of $ revenue to be received in one year for each type of hedge.

Spot rate of NZ dollars = $.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 NZ$

$.50

20%

 

.51

50

 

.53

30

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