Jabes Plc is an American company, it exports electronic gadgets to Chile and imports raw materials in return. Jabes Plc is concerned about its risk exposure from its international transactions and is considering its risk management options. The following transactions in the specified currencies are due in six months time, the company has decided to hedge its currency exposure. The short-term interest rate for lending in Chile is 8%, the equivalent rate in United States is 3%. The rates on deposits in Chile is 6.50% per year and 3.50% per year in United States.

Purchase of goods, cash payment due in 3 months $100,000

Sale of finished goods, cash receipt due in 3 months 30,000,000 Pesos

Purchase of goods, cash payment due in 6 months 50,000,000 Pesos

Jabes Plc have also provided the following relevant exchange rates:

Exchange rates: Bid Ask

Peso/USD Spot rate 635.93 640.10

Three months forward rate 635.77 637.22

Six months forward rate Peso/USD 651.44 655.73

a) Calculate the expected dollar receipts/payments in three months and six months for Jabes Plc if the company uses both the forward market and the money market to hedge its exposure to risk. Based on your calculations, make a recommendation to Jabes Plc as to whether they should use the forward market or the money market to hedge their exposure to risk.

b) Discuss the key characteristics of money market instruments

c) Discuss the difference between transactional exposure, translational exposure, and economic exposure.