A trader domesticated in New Zealand is going to receive 8.5 million units of Samoan currency from a customer living there in four months time. The trader has gathered the following information regarding possible hedges against currency risk (to go along with the spot rates above).

Interest rates: New Zealand - 8.1% (Borrow), 3.2% (Deposit)

Samoa - 11.3% (Borrow), 2.1% (Deposit)

Futures Contract: Current price - 0.5324/$ (Size = 500,000)

In 4 months - 0.5532/$ (anticipated)

	Call options (c/)	Put options (c/)
	2 months	4 months	2 months	4 months
K = 0.5425/$	0.77	0.88	0.31	0.45

The future spot rates are anticipated to be as below:

S_4mth 0.5317 - 0.5503/$

1. Which hedge would you recommend to the trader?Show all calculations and cConsider forward contract, money market, futures contract and option hedges and show all calculations..
2. Critically assess the operation and use of methods to reduce currency risk that do not involve the financial markets.
3. Explain, including the use of a numerical example, how 'the bank alwayswins' in currency transactions.

Answer rating: 100% (QA)

To recommend the most suitable hedge for the trader lets evaluate the different options available 1 Forward Contract Hedge Using the forward contract the trader can lock in a future exchange rate for ... View the full answer