Techniques for Recviables Hedging

SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following infor- mation 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. $0.54 Spot rate of NZ$ One-year call option One-year put option Exercise price = $0.50; premium = $0.07 Exercise price = $0.52; premium = $0.03 U.S. NEW ZEALAND 9% 6% One-year deposit rate One-year borrowing rate 11 8 8 RATE PROBABILITY Forecasted spot rate of NZ$ $0.50 20% 0.51 50 0.53 30