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?

a. borrow NZ$, and invest in USD

b.buy call option

c. buy put option