Assume that XYZ Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 90 days from now. It is trying to determine whether to hedge this position. XYZ has developed the following probability distribution for the New Zealand dollar:
Possible Value of
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New Zealand Dollar in 90 Days Probability
$.40 5%
.45 10%
.48 30%
.50 30%
.53 20%
.55 5%
The 90-day forward rate of the New Zealand dollar is $0.52. The spot rate of the New Zealand dollar is $0.49.
What is the probability that hedging will be more costly to the firm than not hedging?
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