6. At this point, the demand in Mexico is pick up nicely. Your company is currently repatriate 47 million pesos per year from Mexico through ESL class offering and English learning material sales. In addition your company is also import Spanish learning material package produced in Mexico and the company needs to pay about 7 million peso a year from an independent subcontractor located in Mexico. Given recent exchange rate volatility increase, you are asked to identify a good alternative to hedge your companys transaction exposure.

a. Should you hedge peso denominate cash inflow (receivable from export English learning materials and earnings from operation) and cash outflow (payable for import) separately or total cashflows (cash inflow plus cash outflow) or net cashflows (the difference between cash inflow and case outflow)? Why?

b. Based on the following information, please calculate the amounts you would have received based on the following information. You have alternatives of using forward hedge, money market hedge, futures and options. Based on your analysis and calculation, which hedging alternative will you recommend?

Summarv of market information Spot rate Bid Ask $.051 Bid $0.047 USA 2.5% Call option $.0515 2% 0.00103 $515 Bid $0.048 $0.06 Ask $0.057 Mexico 7% Put option $.0515 2.5% 0.0012875 $643.75 Ask $ 0.058 orward contract information USD per peso Monev market rate information Annual Interest rate Option Information American Option 500,000 pesos per contract Exercise price ($ Option premium (% of exercise brice Option premium (S) er pesd Total premium (S) per contract Futures Contract Information USD per peso 500,000 pesos per contract