On April 1, a New Zealand investor decides to hedge a U.S. portfolio worth US$10 million against exchange risk using NZ$ call options. The spot exchange rate is NZ$/US$ = 2.5 or US$/NZ$=0.40. The New Zealand investor can buy November calls NZ$ with a strike price of 0.40 U.S. cents per NZ$ at a premium of 0.8 U.S. cent per NZ$. The size of one contract is NZ$ 125,000. The delta of the option is estimated at 0.5. (a) How many NZ$ calls should our investor buy to hedge the U.S. portfolio against the NZ$/US$ currency risk? (2 marks) (b) A few days later the U.S. dollar has dropped to NZ$/US$ = 2.463 (US$/NZ$ = 0.406) and the dollar value of the portfolio has remained unchanged at US$10 million. The November 40 NZ$ call is now worth 1.2 cents per NZ$ and has a delta estimated at 0.7. What is the result of the hedge? (2 marks) (c) How should the hedge be adjusted? (2 marks) On April 1, a New Zealand investor decides to hedge a U.S. portfolio worth US$10 million against exchange risk using NZ$ call options. The spot exchange rate is NZ$/US$ = 2.5 or US$/NZ$=0.40. The New Zealand investor can buy November calls NZ$ with a strike price of 0.40 U.S. cents per NZ$ at a premium of 0.8 U.S. cent per NZ$. The size of one contract is NZ$ 125,000. The delta of the option is estimated at 0.5. (a) How many NZ$ calls should our investor buy to hedge the U.S. portfolio against the NZ$/US$ currency risk? (2 marks) (b) A few days later the U.S. dollar has dropped to NZ$/US$ = 2.463 (US$/NZ$ = 0.406) and the dollar value of the portfolio has remained unchanged at US$10 million. The November 40 NZ$ call is now worth 1.2 cents per NZ$ and has a delta estimated at 0.7. What is the result of the hedge? (2 marks) (c) How should the hedge be adjusted? (2 marks)