1. What hedging options are available to DKNY?
2. What is the hedged cost of DKNY’s payable using a forward market hedge?
3. What is the hedged cost of DKNY’s payable using a money market hedge?
4. What is the hedged cost of DKNY’s payable using a put option?
5. At what exchange rate is the cost of the put option just equal to the cost of the forward market hedge? To the cost of the money market hedge?
6. How can DKNY construct a currency collar? What is the net premium paid for the currency collar? Using this currency collar, what is the net dollar cost of the payable if the spot rate in 30 days is Mex$12.8/$? Mex$13.1/$? Mex$13.4/$?
7. What is the preferred alternative?
8. Suppose that DKNY expects the 30-day spot rate to be Mex$13.4/$. Should it hedge this payable? What other factors should go into DKNY’s hedging decision?

DKNY, the apparel design firm, owes Mex$7 million in 30 days for a recent shipment of textiles from Mexico. DKNY’s treasurer is considering hedging the company’s peso exposure on this shipment and is looking for some help in figuring out what her different hedging options might cost and which option is preferable. You call up your favorite foreign exchange trader and receive the following interest rate and exchange rate quotes:
Spot rate: ..................... Mex$13.0/$
Forward rate (30 days): ................ Mex$13.1/$
30-day put option on dollars at Mex$12.9/$: ....... 1% premium
30-day call option on dollars at Mex$13.1/$: ....... 3% premium
U.S. dollar 30-day interest rate (annualized): ....... 7.5%
Peso 30-day interest rate (annualized): ........... 15%
Based on these quotes, the treasurer presents you with a series of questions that she would like you to address.