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Compare the money market hedge and the option hedge

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Question;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 = $.40New Zealand dollar spot rateNew Zealand dollar strike priceCall premiumPut premium == $.40$.42$.02$.01Also 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.

 

Paper#49887 | Written in 18-Jul-2015

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