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Currency Swaps. Robert is considering a currency swap to hedge his transaction exposure. The underlying asset will be MXN 3.7M. One year from now, the
- Currency Swaps. Robert is considering a currency swap to hedge his transaction exposure. The underlying asset will be MXN 3.7M. One year from now, the fixed leg will pay out using an exchange rate of MXN 19.6 per USD, and the variable leg will pay out using the spot rate at that time.
- What leg of this transaction should Robert take if he wishes to hedge his exposure to foreign exchange risk?
- What would this swap pay off at each possible exchange rate, ignoring cash flows from the MXN debt he is owed?
- If Robert intends to sell the MXN he is owed for USD as soon as he gets them, and he also hedges his exchange risk exposure with this currency swap, what would his total USD cash flows be at each possible exchange rate?
- Which one of these would be the most sensible choice if Robert is worried that his counterparty might default on their debt? Why?
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
15th edition
77861612, 1259194078, 978-0077861612, 978-1259194078
