Question: 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 = $.03
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U.S.
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New Zealand
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One year deposit rate
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9%
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6%
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One year borrowing rate
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11
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8
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Rate
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Probability
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Forecasted spot rate of NZ$
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$.50
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20%
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.51
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50
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.53
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30
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