Suppose a USA firm has to make a payment of 15 million Mexican Pesos in 1 year. The current spot exchange rate is USD0.04939/MXN and the 1-year forward exchange rate is USD0.04653/MXN.

Describe the forward transaction that would act as a hedge to the scheduled payment of MXN15 million in one year. Would the firm contract to buy or sell 15 million MXN forward at USD0.04653/MXN? Explain why this position would be a hedge.

If the spot rate in one year turns out to be USD0.04850/MXN, determine the value of the payment and the value of the hedge to the US firm. What is the total payoff of the payment with the hedge?