Bridge Ltd is an MNE with its holding company located in Sydney, Australia. It has a New Zealand subsidiary which has declared a dividend of 15 million New Zeland Dollars (NZD), payable in three months from Wellington to the holding company in Sydney.

You are considering hedging your exposure to NZD. The following quotes are available.

Spot exchange rate NZD 1.16 / AUD

Expected spot rate in 6 months NZD1.17 / AUD

6-month forward rate NZD 1.17137 / AUD

6-month NZD interest rate 6% per annum

6-month AUD interest rate 4% per annum

6-month put option on NZD at strike price of NZD 1.1100 / AUD, premium of AUD 0.0250 / NZD.

a) What are the costs of each alternative for hedging the dividend receivable by the Australian Subsidiary?

Give all answers to the nearest number.

a) What are the costs of each alternative for hedging the dividend receivable by the Australian Subsidiary?

i. Do nothing remain uncovered. Assume the spot rate today is the same as the current spot rate (.75 Mark)

Answer AnswerNZDAUD

ii. Do nothing remain uncovered. Assume the spot rate today is the same as the expected spot rate in 3 months (.75 Mark)

Answer AnswerNZDAUD

iii. Money market hedge. (7.5 marks)

This would require the MNE to ______________ borrow frominvest with a ______________New ZealandAustralian Based Bank

The amount they would Answerborrowinvest is Answer AnswerNZDAUD

They would exchange this into Answer AnswerNZDAUD in the spot market

The final proceeds in 3 months will be Answer AnswerNZDAUD

At maturity they would repay the New Zealand/Australian Based Bank Answer AnswerNZDAUD

iv. Buy a 3 months put on the NZD. (6 marks)

Assuming the option is exercised the amount received will be Answer AnswerNZDAUD

The cost of the option will be Answer AnswerNZDAUD

The opportunity cost of the premium will be Answer AnswerNZDAUD

The net proceeds will be Answer AnswerNZDAUD

If the Spot rate was 1.00 NZD/AUD then the net proceeds would be Answer AnswerNZDAUD

****the answer in the questions are blank spaces that need to be answered.