Kiwi Corp. has future receivables of NZD 4,000,000 (NZD = New Zealand dollar) in one year. It must decide whether to use options or a money market hedge to hedge this position. (3 points) 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 one year for each type of hedge-- Option hedge (15 points) and Money market hedge (10 points).

St (NZDUSD) = .54

One-year call option: Exercise price = .49 NZDUSD; premium = USD .06

One-year put option: Exercise price = .52 NZDUSD; premium = USD .03

U.S. New Zealand

One-year deposit rate 9% 7%

One-year borrowing rate 10% 8%

Rate Probability Forecasted St (NZDUSD) rate probability

.48 10%

.51 60%

.53 30%