FORWARD HEDGE DECISION Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected inflation there. Kayla expects that the Mexican peso will depreciate over the next 90 days, yet it plans to hedge its payables with a 90-day forward contract. Why may Kayla believe that it will pay a smaller amount of dollars when hedging than if it remains unhedged?

FORWARD HEDGE Would Oregon Co.s real cost of hedging Australian dollar payables every 90 days have been positive, negative, or about zero on average over a period in which the Australian dollar strengthened consistently? What does this imply about the forward rate as an unbiased predictor of the future spot rate? Explain.