Question
Suppose a U.S.-based company has a subsidiary in Mexico that generates revenue in MXN. The company has a forecasted revenue of MXN 50,000,000 in 6
Suppose a U.S.-based company has a subsidiary in Mexico that generates revenue in MXN. The company has a forecasted revenue of MXN 50,000,000 in 6 months. The current spot exchange rate is USD/MXN 20.50, and the 6-month forward exchange rate is USD/MXN 20.70. The company wants to hedge its currency risk by entering into a forward contract with a notional amount of MXN 50,000,000 and a 6-month maturity. The company's cost of funds is 5% per annum in the U.S. and 6% per annum in Mexico. Calculate the fair value of the forward contract and the net cash flow for the company in USD if it enters into the forward contract.
(You may assume a 360-day year for interest rate calculations.)
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