A New Zealand company will receive a payment in USD in one year. It wants to hedge its exchange rate risk exposure. It will do this by entering into a currency forward contract to buy NZD in exchange for USD in one year. Use this information to help answer the questions that follow. (a) The current spot exchange rate for the New Zealand dollar per US dollar (NZD/USD) is 1.5836. The one-year risk-free rates are 2.0% for the New Zealand dollar and 3.5% for the US dollar. According to CIP, the no-arbitrage one-year NZD/USD forward exchange rate is closet to: Select alternative ✓ (b) Suppose that the company decides to wait a few more weeks before hedging. It then enters into a currency forward contract to buy NZD in exchange for USD at a rate of 1.5502 NZD per USD. A year later, when the company receives the USD payment, the spot NZD/USD exchange rate is 1.6123. In this case, the company would have been Select alternative if it had not hedged.
A New Zealand company will receive a payment in USD in one year. It wants to hedge its exchange rate risk exposure. It will do this by entering into a currency forward contract to buy NZD in exchange for USD in one year. Use this information to help answer the questions that follow. (a) The current spot exchange rate for the New Zealand dollar per US dollar (NZD/USD) is 1.5836. The one-year risk-free rates are 2.0% for the New Zealand dollar and 3.5% for the US dollar. According to CIP, the no-arbitrage one-year NZD/USD forward exchange rate is closet to: Select alternative ✓ (b) Suppose that the company decides to wait a few more weeks before hedging. It then enters into a currency forward contract to buy NZD in exchange for USD at a rate of 1.5502 NZD per USD. A year later, when the company receives the USD payment, the spot NZD/USD exchange rate is 1.6123. In this case, the company would have been Select alternative if it had not hedged.
ChapterP2: Part 2: Exchange Rate Behavior
Section: Chapter Questions
Problem 1Q
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