Assume that a subsidiary in New Zealand needs NZ\($500,000\) and that a credit swap has been proven the least costly hedged alternative. Further assume that the best unhedged alternative is the direct loan from the parent and that the cost of the direct loan is 20 percent. The current exchange rate is \($0.5000\) per New Zealand dollar. To obtain NZ\($500,000\) for the subsidiary in New Zealand, the parent must open a \($250,000\) credit

(\($0.5000\) ¥ NZ\($500,000)\) in favor of a New Zealand bank. The New Zealand bank charges 10 percent per year on the NZ\($500,000\) made available to the subsidiary and pays no interest on the \($250,000\) deposit that the parent has deposited in the bank.

(a) What is the exchange rate that would make the direct loan and the credit swap equally attractive?

(b) If most market analysts predict that the exchange rate will be NZ\($2\) per dollar in 180 days, which alternative would you recommend?

(c) If most market analysts predict that the exchange rate will be NZ\($3\) per dollar in 180 days, which alternative would you recommend?

(d) If the New Zealand bank should pay 5 percent interest on the \($250,000\) credit, what is the exchange rate that would make the direct loan and the credit swap equally attractive?