Question
Assume that Loras Corp. exported goods to New Zealand and will receive 100,000 New Zealand dollars 180 days from now. It is trying to determine
Assume that Loras Corp. exported goods to New Zealand and will receive 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the following probability distribution for the New Zealand dollar:
Possible spot rate of NZ$ in 180 days | Probability |
$0.40 | 5% |
0.45 | 10 |
0.48 | 30 |
0.50 | 30 |
0.53 | 20 |
0.55 | 5
|
The 180-day forward ate of NZ$ is $0.52. The spot rate of NZ$ is $0.49. Developing a table showing a feasibility analysis for hedging. That is, determine the possible differences between the revenue with hedging versus without hedging. What is the probability that hedging will bring less revenue to the firm than not hedging? Determine the expected value of the reduced revenue due to hedging, i.e., the expected real cost of hedging.
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