Suppose a USA firm has to make a payment of 15 million (MM) Mexican Pesos (MXN) in 1 year. The current spot exchange rate is USD0.04994 per MXN and the 1-year forward exchange rate is USD0.04962 per MXN.

Describe the forward transaction that would act as a hedge to the scheduled payment of MXN 15MM in one year. Would the firm contract to buy or sell MXN forward at USD0.04962 per MXN? With the forward contract how much is the firm going to have to pay in USD in one year? Explain why this forward contract works as a hedge.