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In order to hedge its Mexican peso earnings, All-American is considering borrowing MXN 25 million, but is concerned about losing its USD interest tax shield.

In order to hedge its Mexican peso earnings, All-American is considering borrowing MXN 25 million, but is concerned about losing its USD interest tax shield. The spot exchange rate is USD 0.4/MXN, rt,T = 8% and rt,T* = 6%. The tax rate is 35% and the forward rate is USD 0.40755/MXN

a) What is All-Americans tax shield from borrowing in USD?

b) What is All-Americans tax shield from borrowing in MXN?

c) What is the risk-adjusted expected tax shield from borrowing in MXN?

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