Starwood Co. is expecting to receive 800,000 New Zealand dollars in one year. Starwood expects the spot rate of New Zealand dollar to be $0.60 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the New Zealand dollar is quoted at $0.70. The strike price (i.e., exercise price) of put and call options expired one year later are $0.65/NZ$ and $0.62/NZ$ respectively. The premium on both options is $0.03/NZ$. The one-year forward rate exhibits a 9% discount.

How does Starwood Co. use forward contracts to hedge the exchange rate risk for the 800,000 New Zealand dollars receivables and how many U.S. dollars Starwood Co. will receive?

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To hedge the exchange rate risk for its 800000 New Zealand dollars receivables Starwood Co can u... View the full answer