Suppose a U.S. firm buys 1,100,000 pesos TV sets from a Mexican manufacturer for

Question

Suppose a U.S. firm buys 1,100,000 pesos TV sets from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Explanation / Answer

1,100,000 pesos *1 dollar/5.45 pesos=201 834.862 1,100,000 pesos *1 dollar/5.30 pesos=207 547.17 they saved 5 712.30781 dollars

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