Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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.)

Step by Step Solution

3.49 Rating (156 Votes )

There are 3 Steps involved in it

Step: 1

The detailed answer for the above question is provided below To calculate the fair value of the forw... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Accounting

Authors: Timothy Doupnik, Mark Finn, Giorgio Gotti, Hector Perera

5th edition

1259747980, 9781259747984, 1260466531, 978-1260466539

More Books

Students also viewed these Finance questions