You expect to receive 500,000 Pesos one year from now from a Mexican customer. 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 set up the money market hedge, you will borrow in and invest in a) USA; Mexico b) Mexico; USA 3) Using the money market hedge, how many 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; 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 expriation date, the spot price turns out to be $0.8500/Pd. what is the COST of this option 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

Explanation / Answer

4)

B) Mexico, USA

5)

C) $ 46,388

6)

Money market hedge

7)

b) + $2450

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