5. Archimedes SA’s money market hedge. On December 31, 2014, Archimedes SA, the Philippine affiliate of a U.S. irrigation equipment manufacturing company, is projecting its Philippines peso (PHP)-denominated balance sheet for December 31, 2015, as shown in Exhibit 17.7. The current exchange rate is PHP 40 = $1.

a. What is the peso translation exposure under the monetary/nonmonetary and all-current methods?

b. One-year peso forward contracts are available in the United States at a 9 percent discount. Show how the all-current peso translation exposure can be hedged, assuming that cash-flow exchange losses are tax-deductible at 34 percent from normal corporate income.

c. Explain how refinancing the long-term debt in dollars at 5 percent in lieu of the prevailing 9 percent interest rate on peso-denominated long-term debt would result in an alternative translation hedge. How does it compare with the contractual hedge introduced in part b?