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

Q8 comma 500 comma 0008,500,000

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

18.50 %18.50%

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

Construction payment due in 6 months (A/P, quetzals) 8,500,000 Present spot rate (quetzals/$) 7.16 6-month forward rate (quetzals/$) 7.30 Guatemalan 6-month interest rate (per annum) 15.00% U.S. dollar 6-month interest rate (per annum) 5.00% Farah's weighted average cost of capital (WACC) 18.50%

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:

Highest expected rate (reflecting a significant devaluation) 8.52 Expected rate 7.57 Lowest expected rate (reflecting a strengthening of the quetzal) 6.70

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

Upper Q 8.52 divided by $Q8.52/$?

Upper Q 7.57 divided by $Q7.57/$?

Upper Q 6.70 divided by $Q6.70/$?

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?