Computation of revenue on hedging of an investment

Reference no: EM1312640

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 = $.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

Reference no: EM1312640

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