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Hedging Payables

Real Cost of Hedging Payables

Assume that Loras Corp imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the following probability distribution for the New Zealand dollar:

Possible Value of New Zealand Dollar in 180 Days Probability
$.40 5%
.45 10
.48 30
.50 30
.53 20
.55 5

The 180 day forward rate of the New Zealand dollar is $.52. The spot rate of the New Zealand dollar is $.49. Develop a table showing a feasibility analysis for hedging. That is, determine the possible differences between the costs of hedging versus no hedging. What is the probability that hedging will be more costly to the firm than not hedging? Determine the expected value of the additional cost of hedging.

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