Assume the following information:
|
U.S. deposit rate for 1 year
|
=
|
10%
|
|
U.S. borrowing rate for 1 year
|
=
|
12%
|
|
New Zealand deposit rate for 1 year
|
=
|
8%
|
|
New Zealand borrowing rate for 1 year
|
=
|
10%
|
|
New Zealand dollar forward rate for 1 year
|
=
|
$.40
|
|
New Zealand dollar spot rate
New Zealand dollar strike price
Call premium
Put premium
|
=
=
|
$.40
$.42
$.02
$.01
|
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$700,000 in 1 year. You are a consultant for this firm. Compare the money market hedge and the option hedge. Make sure to indicate the value of NZ$ at which the U.S. exporter will be indifferent between the two hedging strategies as part of your answer.