Intro

RoboLand is a U.S. company that exports robotic toys to Mexico. The company expects to receive 5,000,000 Mexican pesos (MXN) in one year from its exports.

The firm expects the following exchange rate scenarios and probabilities:

Scenario	Spot rate in one year	Probability
A	$0.0441	0.5
B	$0.0449	0.4
C	$0.0457	0.1

The spot rate is $0.0449 per peso and the one-year forward rate is $0.0462 per peso.The U.S. interest rate is 3% and the Mexican interest rate is 10%.

A put option on pesos expiring in one year costs $0.0041 per peso and has an strike priceof $0.0449 per peso.

Attempt 1/10 for 10 pts.

Part1

What is the expected dollar cash flow in one year if the company does not hedge its receivables (in $)?

Correct

Scenario	Spotrate in 1 year	Probability	Dollar cash flow
A	$0.0441	0.5	$220,500
B	$0.0449	0.4	$224,500
C	$0.0457	0.1	$228,500

Expected cash flow = 0.5 * $220,500 + 0.4 * $224,500 + 0.1 * $228,500

= $222,900

Attempt 1/10 for 10 pts.

Part2

What will be the cash inflow if the firm uses a forward contract (in $)?

Correct

Cash inflow in $ = Receivables x Forward rate

= MXN5,000,000 * $0.0462/MXN

= $231,000

Attempt 10/10 for 10 pts.

Part3

What is the value of the receivables in one year with a money market hedge (in $)?

Submit

Attempt 8/10 for 10 pts.

Part4

What is the expected value of the receivables in one year with the put option hedge (in $)? Ignore the time value of money, i.e., the fact that the option premium has to be paid now rather than in a year.

Submit

Attempt 1/5 for 10 pts.

Part5

What is the optimal strategy for the company?

Money market hedge

Forward contract

Put options

No hedging

Correct

Since the forward contract results in the largest dollar cash flow, it is the optimal strategy for the firm.

My 4th time asking the same question. Last 3 times were wrong. Please help