Comparison of Techniques for Hedging Payables SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in 1 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 1 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