At this point, the demand in Mexico is picking up nicely. Yourcompany is currently repatriating 47 million pesos per year fromMexico through the ESL class offering and English learning materialsales. In addition your company is also importing Spanish learningmaterial packages produced in Mexico and the company needs to payabout 7 million pesos a year from an independent subcontractorlocated in Mexico. Given recent exchange rate volatility increase,you are asked to identify a good alternative to hedge yourcompany’s transaction exposure.
Based on the following information, please calculate the amountsyou would have received based on the following information. Youhave alternatives of using forward hedge, money market hedge,futures and options. Based on your analysis and calculation, whichhedging alternative will you recommend?
| |
| Summary of market information |
| |
Spot rate | Bid | Ask |
| $.051 | $0.06 |
| | |
Forward contract information | Bid | Ask |
USD per peso | $0.047 | $0.057 |
| | |
Money market rate information | Bid (borrowing) | Ask (lending) |
Annual Interest rate for Peso | 5.1% | 7% |
Annual Interest rate for USD | 2.5% | 3.7% |
| | |
Option Information American Option
500,000 pesos per contract | Call option | Put option |
Strike price ($) | $.0515 | $.0515 |
Option premium (% of exercise price) | 2% | 2.5% |
Option premium ($) per peso | 0.00103 | 0.0012875 |
Total premium ($) per contract | $515 | $643.75 |
| | |
Futures Contract Information | Bid | Ask |
USD per peso 500,000 pesos per contract | $0.048 | $ 0.058 |
