Question
Assume that Loras Corp. imported goods from New Zealand and needs 80,000 New Zealand dollars 180 days from now. It is trying to determine whether
Assume that Loras Corp. imported goods from New Zealand and needs 80,000 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 VALUE OF NEW ZEALAND DOLLAR IN 180 DAYS | PROBABILITY | ||
$0.38 | 6 | % | |
0.45 | 13 | ||
0.46 | 28 | ||
0.52 | 28 | ||
0.54 | 20 | ||
0.56 | 5 |
The 180-day forward rate of the New Zealand dollar is $0.51. The spot rate of the New Zealand dollar is $0.49. Develop a table showing a feasibility analysis for hedging. That is, determine the possible differences between the costs of hedging versus no hedging. Use a minus sign to enter a negative value, if any. Round your answers to the nearest dollar.
Possible Spot Rate of New Zealand Dollar | Probability | Nominal Cost of Hedging 80,000 NZ$ | Amount of U.S. Dollars Needed to Buy 80,000 NZ$ if Firm Remains Unhedged | Real Cost of Hedging | ||
$0.38 | 6% | $ | $ | $ | ||
$0.45 | 13% | $ | $ | $ | ||
$0.46 | 28% | $ | $ | $ | ||
$0.52 | 28% | $ | $ | $ | ||
$0.54 | 20% | $ | $ | $ | ||
$0.56 | 5% | $ | $ | $ |
What is the probability that hedging will be more costly to the firm than not hedging? Round your answer to the nearest whole number.
%
Determine the expected value of the additional cost of hedging. Round your answer to the nearest dollar.
$
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