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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

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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 20.00\% per annum as its weighted average cost of capital. Today's foreign exchange and interest rate quotations are as follows: 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: 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 Q8.18/\$? Q7.29/\$? Q6.58/\$? 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? \begin{tabular}{lr} \hline Construction payment due in 6 months (A/P, quetzals) & 8,500,000 \\ Present spot rate (quetzals/\$) & 6.91 \\ 6-month forward rate (quetzals/\$) & 7.05 \\ Guatemalan 6-month interest rate (per annum) & 14.00% \\ U.S. dollar 6-month interest rate (per annum) & 5.50% \\ Farah's weighted average cost of capital (WACC) & 20.00% \\ \hline Click on the icon located on the top-right corner of the data table in order \end{tabular} to copy its contents into a spreadsheet. Expected spot rate in 6-months (quetzals/\$): \begin{tabular}{lr} \hline Highest expected rate (reflecting a significant devaluation) & 8.18 \\ Expected rate & 7.29 \\ Lowest expected rate (reflecting a strengthening of the quetzal) & 6.58 \\ \hline Click on the icon located on the top-right corner of the data table in order to \end{tabular} Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet

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