Question
Your company is considering hedging its exposure to the New Zealand dollar and the Japanese yen. You observe the following spot, forward, and interest rate
Your company is considering hedging its exposure to the New Zealand dollar and the Japanese yen. You observe the following spot, forward, and interest rate quotations:
Spot Exchange Rate | Two-Years Forward Rate | Two Years Interest Rate | |
New Zealand | 0.67 USD/NZD | 0.6442 UDS/NZD | 3% |
Japan | 102 JPY/USD | 101 JPY/USD | 0.5% |
USA | 1% |
a. First, your boss asks you to check that the forward rates above are consistent with covered interest parity.
b. Your boss says, we dont want to use a derivatives contract unless we have toit would raise questions among our shareholders. Please find me an alternative way to hedge. Please describe a set of borrowing and lending transactions that would have exactly the same cashflows as a long NZD forward contract, in which your firm stands to receive NZD1000 in exchange for USD644.2 in two years time.
c. Please describe a set of borrowing and lending transactions that would have exactly the same cashflows as a short JPY forward contract, in which your firm stands to deliver JPY101,000 in exchange for USD1000 in two years time.
d. Your boss enters the above forward contracts anyway. One year passes, and your boss decides to call your counterparty (XYZ Bank) to close the positions. She asks you to calculate the market value of each forward contract. You observe the following market data:
Spot Exchange Rate | One-Year Interest Rate | |
New Zealand | 0.62 USD/NZD | 2.5% |
Japan | 106 JPY/UDD | 0.25% |
USA | 1.5% |
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