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	$0.0415	0.5
B	$0.0425	0.4
C	$0.0435	0.1

The spot rate is $0.0425 per peso and the one-year forward rate is $0.044 per peso. The U.S. interest rate is 4% and the Mexican interest rate is 10%.

A put option on pesos expiring in one year costs $0.0022 per peso and has an strike price of $0.0425 per peso.

Part 1

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

Part 2

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

Part 3

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

Part 4

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.