You expect to receive 500.000 Pesos one year from now from a Mexican customer. Y

ID: 2727269 • Letter: Y

Question

You expect to receive 500.000 Pesos one year from now from a Mexican customer. You plan to construct a Money market hedge to protect yourself. USA interest rate is 8% and Mexico rate is 6%. Spot rate is $0.10/Peso: Forward rate is $0.08/Peso Use this data to answer three questions. To seTup the money market hedge, you will borrow in and invest in_a) USA: Mexico b) Mexico: USA 5)Using the money market hedge. how mam dollars will you receive one year from now a)$62.978 b)^50.943 c)$46.388 d)$55.176 6)Compare the above results with the forward market hedge. Which will you pick? a)Forward Market hedge b)Money Market hedge 7)You have an accounts payable of 100.000 Pounds due in one year. Call options on BP are available with the following features: Contract size 100.000: Expiration in one year. Exercise price:$0.8520/Pd. Call Premium is $0.0225/pd; You plan to hedge this risk by buying a call option. Assume that on the expiration date. the spot price turns out to be S0.8500/Pd. What is the COST of this opt on hedge to you (I am not asking if you made a profit or loss. but what did using the call option cost you?) a)-$2250 b)+2450 c)-$2450 d)+2250 8) If you have a receivables exposure in foreign currency. which of the following staitegics will NOT be appropriate to use? a) Sell currency forward b) Sell currency futures c) Buy currency put d) Buy currency call option 9)Buyer of the currency put option in a hedging or speculating scenario. will gain if the spot rate is than exercise price a)greater b)less

Explanation / Answer

4) BORROW IN FOREIGN CURRENCY AND INVEST IN DOMESTIC CURRENCY

IE BORROW IN MEXICO AND INVEST IN USA

5)FOREIGN CURRENCY IS AN ASSWET. AMOUNT 500000 PESOS

CREATE LIABILITY

BORROW PESO @6%

AMOUN TTO BE BORROWED 500000/1.06

471698.11 PESOS

CONVERT: SELL PESO AND BUY $

471698.11 x 010

47169.81 $

iNVEST $ @ 8% GETTING 47169.81*1.08

$ 50943.39

SETTLE

USING FORWARD RATE 500000 X.08

$ 40000

GAIN = 10943.

6) MONEY MARKET HEDGE

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You expect to receive 500.000 Pesos one year from now from a Mexican customer. Y

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