Question 2 (20 Points) Boeing has a view regarding the New Zealand dollar and wo
ID: 2803450 • Letter: Q
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Question 2 (20 Points) Boeing has a view regarding the New Zealand dollar and would like to benefit from yBoeing believes the NZD will appreciate above 0.68 USD per NZD within 12 Version Fall 2017 Now suppose ke a zero-cost hedge. In addition, Boeing would like the safety of a floor rate e wrong regarding the appreciation of the NZD) ot 0.62 USD per NZD You view, namely, Boeing Further, Boeing would like a n Exhibit 2. (We'll ignore bid-ask spreads in options prices in this question.) Exhibit 2 Maturity: 12 Months Put Premium (USD per NZD) Call Premium (USD per NZD) 0.0800 Strike (UsD per NZD) 0.60 0.0700 0.0600 0.0500 0.0400 0.0250 0.0350 0.0400 0.0500 0.0600 0.62 0.0350 0.0250 0.68 0.70 0.72 0.0700 0.0800 Analysis Construct a zero-cost required floor rate. Choose from the options listed in Exhibit 2 range forward hedge using options and complying with Boeing's Which option (put or call) would Boeing in USD per NZD? a. buy? At what strike price? What is its premium Put or Call? Strike Premium per NZD b. Which option (put or call) would Boeing sel? At what strike price? Put or Call? StrikeExplanation / Answer
The zero-cost range forward hedge is primarily used by those companies who are wary of the exchange rate fluctuations and anticipate that the exchange rates may appreciate or depreciate in the future. Hence, instead of a single exchange rate, they use a range of rates. The bottom rate is called the floor rate and the top rate is called the cap rate. Companies generally use this strategy to hedge their exposure and take advantage of the fluctuating exchange rate of the other import/export partner. Here, the floor price is given as 0.62 USD per NZD.
a. Boeing will buy the call option since its exporter is in New Zealand. The option strategy will involve purchasing or buying out of money calls. The strike price would be the lower cap rate, .i.e, at 0.62 USD per NZD. The premium per NZD is 0.0700 USD per NZD.
b. Boeing will sell at a higher rate following the concept of 'Buy at a lesser rate, sell at a higher rate'. Here, the strategy would be to buy out-of-money put. Since Boeing is sure that the NZD will appreciate, it will fix the upper cap price. THe strike price will be 0.72 USD per NZD. The put premium will be 0.0800 USD per NZD
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