Answer to Question #64084 in Economics for hamza

Question

3. Millennium Publications, an American company has to pay NZD 1 million in three months to its supplier in New Zealand. The current spot rate is USD 0.6100/NZD. The company is thinking of using option in order to reduce transaction exposure as the value of New Zealand Dollar is expected to increase when the payment due.

• Call option on NZD 1 million at exercise price of USD 0.6200/NZD: a 1.5% premium
• Put option on NZD 1 million at exercise price of USD 0.6205/NZD: a 1% premium
• WACC for Millenium is at 10%

Based on the information above, which option should the company choose? How much is the total cost to the company if they used option market to hedge this transaction exposure. Assume the spot rate three months from now is USD 0.6300/NZD.