Exam 11: Managing Transaction Exposure

Since the results of both a money market hedge and a forward hedge are known beforehand,an MNC can implement the one that is more feasible.

Assume that Patton Co.will receive 100,000 New Zealand dollars (NZ$)in 180 days.  Today's spot rate of the NZ$ is $.50,and the 180day forward rate is $.51.  A call option on NZ$ exists,with an exercise price of $.52,a premium of $.02,and a 180day expiration date.  A put option on NZ$ exists with an exercise price of $.51,a premium of $.02,and a 180day expiration date.  Patton Co.has developed the following probability distribution for the spot rate in 180 days: The probability that the forward hedge will result in more U.S.dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S.dollars received on the options hedge).

Money Corp.frequently uses a forward hedge to hedge its Malaysian ringgit (MYR)receivables.For the next month,Money has identified its net exposure to the ringgit as being MYR1,500,000.The 30-day forward rate is $.23.Furthermore,Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25,with probabilities of.30 and.70,respectively.Based on this information,what is the expected real cost of hedging receivables