QUESTION 4 Assume that Methanex Corporation imported goods from New Zealand and needs…

QUESTION 4

Assume that Methanex
Corporation imported goods from New Zealand and needs NZD100,000
180 days from now. It is trying to determine whether to hedge this
position. Methanex has developed the following probability
distribution for the New Zealand dollar:

The 180-day forward
rate of the New Zealand dollar is USD0.5200. The spot rate of the
New Zealand dollar is USD0.4900. Develop a table showing a
feasibility analysis for hedging. That is, determine the possible
differences between the costs of hedging versus no hedging.

1. Calculate the probability that hedging will be more costly to
   the firm than not hedging.
2. Determine the expected value of the additional cost of
   hedging.

(25 marks)