Kiwi Ecowood (KE) is a well-known producer of lumber and plywood based products that include wood...

 

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Kiwi Ecowood (KE) is a well-known producer of lumber and plywood based products that include wood utility poles, scaffold boards and foundation and marine piling in Christchurch, New Zealand. KE is due to receive 20% more than last year's amount from Boston Railway (BR), a U.S company, in 2 months. KE is considering 3 strategies to reduce the risks of this trading: Strategy 1: By entering forward market hedge Strategy 2: By entering money market hedge Strategy 3: By entering option market hedge The related information are as follows: Current Spot Rate (USD/NZD) 2-month Expected Spot Rate (USD/NZD) 2-month Forward Rate (USD/NZD) 0.4200 - 05 0.4100 - 55 0.4195-98 KE's Cost of Capital (per annum) BR's Cost of Capital (per annum) Last Year Amount (USD) Information on Interest Rate (per annum) New Zealand United States Information on Option Market 60-day Call Option on NZD: Exercise Price (NZD/USD) Premium 4.00% 3.00% 3,800,000 60-day Put Option on NZD: Exercise Price (NZD/USD) Premium 3.75% - 3.85% 2.65% - 2.75% 2.3669 1% 2.3810 2% KE does not have surplus cash and wishes to maintain its target capital structure. Show relevant calculations and recommend the best strategy for the exporter to manage its exchange rate exposure. (22 marks) Kiwi Ecowood (KE) is a well-known producer of lumber and plywood based products that include wood utility poles, scaffold boards and foundation and marine piling in Christchurch, New Zealand. KE is due to receive 20% more than last year's amount from Boston Railway (BR), a U.S company, in 2 months. KE is considering 3 strategies to reduce the risks of this trading: Strategy 1: By entering forward market hedge Strategy 2: By entering money market hedge Strategy 3: By entering option market hedge The related information are as follows: Current Spot Rate (USD/NZD) 2-month Expected Spot Rate (USD/NZD) 2-month Forward Rate (USD/NZD) 0.4200 - 05 0.4100 - 55 0.4195-98 KE's Cost of Capital (per annum) BR's Cost of Capital (per annum) Last Year Amount (USD) Information on Interest Rate (per annum) New Zealand United States Information on Option Market 60-day Call Option on NZD: Exercise Price (NZD/USD) Premium 4.00% 3.00% 3,800,000 60-day Put Option on NZD: Exercise Price (NZD/USD) Premium 3.75% - 3.85% 2.65% - 2.75% 2.3669 1% 2.3810 2% KE does not have surplus cash and wishes to maintain its target capital structure. Show relevant calculations and recommend the best strategy for the exporter to manage its exchange rate exposure. (22 marks)

Answer rating: 100% (QA)

Given Last Year Amount USD 3800000 Current Spot Rate USDNZD 23669 2month Expected Spot Rate USDNZD 2... View the full answer