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PepsiCo would like to hedge its C$40 million payable to Alcan, a Canadian aluminum producer, which is due in 90 days. Suppose it faces the
PepsiCo would like to hedge its C$40 million payable to Alcan, a Canadian aluminum producer, which is due in 90 days. Suppose it faces the following exchange and interest rates: Spot rate: $0.9422-31/C$; Forward rate (90 days): $0.9440-61/C$; Annualized 90-day interest rates are 4.71%-4.64% for Canadian dollar and 5.50%-5.35% for the U.S. dollar (the first interest rate is the borrowing rate and the second one is the lending rate) a. Calculate the total cost of a forward hedge for this payable. (3 marks) b. Calculate the total costs of a money market hedge for this payable. (4 marks) c. Which hedging alternative would you recommend? (1 mark)
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