SMU Corp. has future receivables of 4,000,000 New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position.

Spot rate of NZ$ = $.54

One year call option: Exercise price = $.50; premium = $.07

One year put option: Exercise price = $.52; premium = $.03

U.S. New Zealand

One year deposit rate 9% 6%

One year borrowing rate 11%. 8%

Rate Probability

Forecasted spot rate of NZ$ $.50 20%

.51 50%

.53 30%

Which of the following is not an appropriate hedging strategy for the firm's receivables?

borrow NZ$, and invest in USD or buy call option or buy put option

What is the dollar amount received in one year with option hedge?

2,168,000 or 2,056,000 or 2,180,000

What is the dollar amount received in one year with the money market hedge?

2,168,000 or 2,056,000 or 2,180,000

What is the optimal hedging strategy for SMU corporation's receivable position?

put option hedge or call option hedge or money market hedge