6 pts) Assume that Vermont Co. has net payables of 1,000,000 Mexican pesos in 180 days. The Mexican periodic interest rate is 6% over 180 days (12% per year compounded semi-annually), and the spot rate of the Mexican peso is $0.052. Assume US periodic interest rates of 1% over 180 days or (annual rate is 2%, so periodic rate is 1% per 180 days). What is the US dollar cost of the payables in 180 days if the firm uses a money market hedge? Assume borrowing and lending rates are the same for simplicity. Be precise.

1. (6 pts) Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the following probability distribution for the New Zealand dollar:

Possible Value of

New Zealand Dollar in 180 Days Probability

$.65 5%

.68 10%

.70 30%

.74 30%

.75 20%

.77 5%

The 180-day forward rate of the New Zealand dollar is $.73. The spot rate of the New Zealand dollar is $.725. Develop a table showing a feasibility analysis for hedging. That is, determine the possible differences between the costs of hedging versus no hedging. What is the probability that hedging will be more costly to the firm than not hedging?