Exxon Oil Corp. is negotiating the purchase of 1 million barrels of oil from a b
ID: 2800222 • Letter: E
Question
Exxon Oil Corp. is negotiating the purchase of 1 million barrels of oil from a bankrupt competitor to be delivered and paid for in exactly 1 year. The oil exporter wants the contract expressed in Mexican Pesos, and the current "in USD" Peso exchange rate is $0.071. The contract is signed at a price of 1440 Pesos per barrel. Exxon can enter a futures contract that allows the company to purchase Pesos at the exact time of oil delivery at $0.072. If we consider the use of the futures contract to hedge Exxon's foreign exchange risk, how much is the cost of this insurance to Exxon?
$
Note: Round your answer to the closest $USD.
Explanation / Answer
Agreed Price = Pesos 1440 x 1million = 1440 million
Agreed Price in USD = 1440 million x 0.071 = $ 102.24 millions
Amount to be paid at the time of delivery (in USD) if payment is hedged using future contract = 1440 million x 0.072 = $ 103.68 millions
Cost of Insurance to Exxon = $ 103.68 millions - $ 102.24 millions = $ 1.44 millions
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