$6.$AccountingforUncertainCashFlows. Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will gen$-$ erate MXP$3$ million in revenue at the end of the next year. However, it might also receive a contract to provide this technology to the Mexican govern$-$ ment. In this case, it will generate a total of MXP$5$ million at the end of the next year. It will not know whether it will receive the government order until the end of the year.

Today$$s spot rate of the peso is $$\mathrm{.}14.$ The one$-$ year forward rate is $$\mathrm{.}12.$ Blustream expects that the spot rate of the peso will be $$\mathrm{.}13$ one year from now. The only initial outlay will be $$300,000$ to cover development expenses $($regardless of whether the Mexican government purchases the technol$-$ ogy$).$ Blustream will pursue the project only if it can satisfy its required rate of return of $18$ percent. Ignore possible tax effects. It decides to hedge the maximum amount of revenue that it will receive from the project.

a$.$ Determine the NPV if Blustream receives the government contract.

b$.$ If Blustream does not receive the contract, it will have hedged more than it needed to and will off$-$ set the excess forward sales by purchasing pesos in the spot market at the time the forward sale is ex$-$ ecuted. Determine the NPV of the project assum$-$ ing that Blustream does not receive the government contract.

c$.$ Now consider an alternative strategy in which Blustream only hedges the minimum peso revenue that it will receive. In this case, any revenue due to the government contract would not be hedged. De$-$ termine the NPV based on this alternative strategy and assume that Blustream receives the government contract.

Chapter $14$: Multinational Capital Budgeting $411$

d$.$ If Blustream uses the alternative strategy of only hedging the minimum peso revenue that it will re$-$ ceive, determine the NPV assuming that it does not receive the government contract.

e$.$ If there is a $50$ percent chance that Blustream will receive the government contract, would you advise Blustream to hedge the maximum amount or the minimum amount of revenue that it may re$-$ ceive? Explain.

f$.$ Blustream recognizes that it is exposed to ex$-$ change rate risk whether it hedges the minimum amount or the maximum amount of revenue it will receive. It considers a new strategy of hedging the minimum amount it will receive with a forward contract and hedging the additional revenue it might receive with a put option on Mexican pesos. The one$-$year put option has an exercise price of $$\mathrm{.}125$ and a premium of $$\mathrm{.}01.$ Determine the NPV if Blustream uses this strategy and receives the gov$-$ ernment contract. Also, determine the NPV if Blu$-$ stream uses this strategy and does not receive the government contract. Given that there is a $50$ per$-$ cent probability that Blustream will receive the gov$-$ ernment contract, would you use this new strategy or the strategy that you selected in question $($e$)?$