Construction payment due in 6 months (A/P, quetzals)	8,500,000
Present spot rate (quetzals/$)	7.11
6-month forward rate (quetzals/$)	7.29
Guatemalan 6-month interest rate (per annum)	14.50%
U.S. dollar 6-month interest rate (per annum)	5.00%
Farah's weighted average cost of capital (WACC)	18.50%

Expected spot rate in 6-months (quetzals/$):
Highest expected rate (reflecting a significant devaluation)	8.42
Expected rate	7.55
Lowest expected rate (reflecting a strengthening of the quetzal)	6.81

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

Q8,500,000

is due in six months. ("Q" is the symbol for Guatemalan quetzals.) Farah uses

18.50%

per annum as its weighted average cost of capital. Today's foreign exchange and interest rate quotations are as follows:

LOADING...

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

LOADING...

. a. How much in U.S. dollars will Farah Jeans pay in 6 months without a hedge if the expected spot rate in 6 months is

Q8.42/$?

Q7.55/$?

Q6.81/$?

b. How much in U.S. dollars will Farah Jeans pay in 6 months with a forward market hedge?

c. How much in U.S. dollars will Farah Jeans pay in 6 months with a money market hedge?

d. Which method would you select and why?

Question content area bottom

Part 1

a. How much in U.S. dollars will Farah Jeans pay in 6 months without a hedge if the expected spot rate in 6 months is

Q8.42/$?

$enter your response here

(Round to the nearest dollar.)

Part 2

How much in U.S. dollars will Farah Jeans pay in 6 months without a hedge if the expected spot rate in 6 months is

Q7.55/$?

$enter your response here

(Round to the nearest dollar.)

Part 3

How much in U.S. dollars will Farah Jeans pay in 6 months without a hedge if the expected spot rate in 6 months is

Q6.81/$?

$enter your response here

(Round to the nearest dollar.)

Part 4

b. How much in U.S. dollars will Farah Jeans pay in 6 months with a forward market hedge?

$enter your response here

(Round to the nearest dollar.)

Part 5

c. How much in U.S. dollars will Farah Jeans pay in 6 months with a money market hedge?

$enter your response here

(Round to the nearest dollar.)

Part 6

d. Which method would you select and why?(Select from the drop-down menu.)

The

forward market hedge

money market hedge

unhedged position

provides the lowest certain cost hedging method for payment settlement.