Problem 9

Intro

Taquito is a U.S. fast food chain which imports supplies from Mexico. The company will need 1,000,000 Mexican pesos (MXN) in one year to pay its suppliers.

The firm expects the following exchange rate scenarios and probabilities:

Scenario	Spot rate in one year	Probability
A	$0.0431	0.4
B	$0.0437	0.3
C	$0.0443	0.3

The spot rate is $0.0437 per peso and the one-year forward rate is $0.0443 per peso. The U.S. interest rate is 5% and the Mexican interest rate is 9%.

A call option on pesos expiring in one year costs $0.0038 per peso and has an exercise price of $0.0437 per peso.

Attempt 1/6 for 10 pts.

Part 1

What is the expected cost of obtaining $1,000,000 pesos in one year if the company does not hedge its payables (in $)?

Submit

Attempt 1/6 for 10 pts.

Part 2

What is the total cost if Taquito uses a foward contract to buy pesos (in $)?

Submit

Attempt 1/6 for 10 pts.

Part 3

What is the total cost of creating a money market hedge, including interest (in $)?

Submit

Attempt 1/6 for 10 pts.

Part 4

What is the total cost of hedging your payables with a call option (in $)?

Submit

Attempt 1/5 for 10 pts.

Part 5

What is the optimal strategy for the company?

Call options

Money market hedge

Forward contract

No hedging

Submit