Farah Jeans. Farah Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City.

A final construction payment of Q8,400,000 is due in six months. (“Q” is the symbol for Guatemalan quetzals.)

Lucky 13 uses 20% per annum as its weighted average cost of capital. Today’s foreign exchange and interest rate quotations are as follows:

Farah’s treasury manager, concerned about the Guatemalan economy, wonders if Lucky 13 should be hedging its foreign exchange risk. The manager’s own forecast is as follows:

What realistic alternatives are available to Farah for making payments? Which method would you select and why?

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Construction payment due in 6 months 8,400,000 (A/P, quetzals) Present spot rate (quetzals/$) 70000 6-month forward rate (quetzals/$) Z1000 Guatemalan 6-month interest rate 14.000% (per annum) U.S. dollar 6-month interest rate 6.000% (per annum) Farah's weighted average cost of capital (WACC) 20.000%