JrHeadcon is hydro-construction firm with a government contract to install salt water purification plants in a number of Chile's northern coastal desert settlements The work is to be completed in one year at which time the final payment of 25B( billion) Chilean Pesos (CLPs) will be wired to JrHeadcon's NY bank.At the current spot exchange rate of .002USDs per CLP, the contract payment would be worth 50M USDs.JrHeadcon is confident it will complete the project on time so the chief financial officer (CFO) of JrHeadcon calls you, his NY banker and requests a one-year forward exchange rate quote from the bank to sell the CLPs.

Before calling the CFO back you look up the current interbank lending/borrowing rates for CLPs and USDs. The current one-year interbank interest rates are i(CLP) = 6% and i(USD) = 2%.

A.Design a set of lending/borrowing positions in the interbank money market that will generate a risk-free one-year-ahead forward rate quote stated in terms of USDs per CLP.Explain why this is a risk-free quote.

B. How much will the USD value of the 25B CLP one-year-ahead contract payment be if JrHeadcon accepts the offered forward rate from your bank?

Hint: See the money market hedge setup in Note Set 7.