Assume that Wolverine expects to receive NZ$500,000 at the end of Year 1. The existing spot rate

Question:

Assume that Wolverine expects to receive NZ$500,000 at the end of Year 1. The existing spot rate of the New Zealand dollar is $0.60, while the one-year forward rate is $0.62. Wolverine has created a probability for the future spot rate in one year as follows:
Future Spot Rate__________ Probability
$0.61...................................20%
$0.63...................................50%
$0.67...................................30%
Assume that one-year put options on New Zealand dollars are available with an exercise price of $0.63 and a premium of $0.04 per unit. One-year call options on New Zealand dollars are available with an exercise price of $0.60 per unit. Assume the following money market rates:

United States New Zealand Deposit Rate 8% 5% Borrowing Rate 9%

Given the above information, determine whether a forward hedge, money market hedge, or currency options hedge would be most appropriate to mitigate currency risk. Then, compare your choice of hedging technique to an unheeded strategy and recommend whether Wolverine should hedge its receivables.
Assume that Wolverine expects to need NZ$1 million in one year to meet its short-term obligations (for example, accounts payable). Using any relevant information from Part 4, determine whether a forward hedge, money market hedge, or a currency options hedge would be the most appropriate tool. Then, compare your choice with an unheeded strategy and decide whether Wolverine should hedge its payables positions.
Assume that Wolverine uses the original financing proposal in Part 1 and that funds are blocked until the subsidiary is sold. The funds to be remitted are reinvested at a rate of 6%, after taxes, until the end of Year 3. How is the project NPV affected by this scenario?
What is the break-even salvage value of this project if Wolverine uses the original financing proposal and funds are not blocked? Discuss your answer.
Assume that Wolverine decides to implement the project using the original financing proposal. Also assume that after one year, a New Zealand firm offers Wolverine a price of $27 million after taxes for the subsidiary and Wolverine's original forecasts for Years 2 and 3 have not changed. Should Wolverine accept or reject the offer? Explain.

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