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4. Your U.S. company needs 50,000 Mexican pesos to pay for imported parts one year from today. In order to remove the exchange rate
4. Your U.S. company needs 50,000 Mexican pesos to pay for imported parts one year from today. In order to remove the exchange rate risk from the payment, you consider two strategies. (a) Invest X in a U.S. bank account that earns 6% interest per year. Buy a one year forward contract to purchase pesos at 0.25 dollars per pesos. What is the dollar-cost (X) of the imported parts under this strategy? (b) Sell Y dollars for pesos today and put the pesos in a Mexican bank account that earns 20% interest per year. If covered interest parity (CIP) holds, is there an advantage to this strategy compared to (a)? (c) Using the information in (a) and (b), what must the spot exchange rate (dollars per peso) be if CIP holds? 5. You are a financial adviser to a U.S. corporation that expects to receive a payment of 60 million Indian Rupees in 180 days for goods exported to India. The current spot rate is 100 Rupees per U.S. dollar (ES/INR = 0.01). You are concerned that the U.S. dollar is going to appreciate against the rupee over the next six months. (a) Assuming the exchange rate remains unchanged, how much does your firm expect to receive in U.S. dollars? (b) How much would your firm receive (in U.S. dollars) if the dollar appreciated to 110 rupees per U.S. dollar (Es/INR = 0.00909)? (c) Describe in words how you could use a forward contract to hedge against the risk of losses associated with the potential appreciation in the U.S. dollar?
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