V. . assignment_4.pdf Home Tools assignment_4_sol... assignment_5_sol... assignment_4.pdf X G) ! Sign In @QBQG'DCDi/a kTGC'DJMW'VE'?EI/gll 628% 1. Hedging exchange rates (25 points) Consider an Argentinan manufacturing rm that needs to import a 1000 USD capital good from the US. At the time of the operation the pesodollar exchange rate is 190 pesos per dollar, Payment in dollars is due upon delivery of the machine, scheduled for one year later, The Argentinean rm has four potential instruments to hedge exchange-rate movements: 1) Uncovered. Pay the spot rate at time of delivery to convert pesos to dollars. ii) Forward contract. Purchase forward contracts to exchange 190,000 pesos for 1000 dollars a year from today. iii) Put option on peso. Pay a fee of 8,000 pesos today for the right to sell 195,000 pesos at the rate of 195 pesos per dollar at any time up to one year from today, iv) Buy dollars now. Purchase dollars now at the current spot rate and invest $952.38 in l-year US treasuries paying 5% return. 1. For each of these four instruments, compute the realized cost in terms of number of pesos spent today and number of pesos spent a year later if a) the spot rate a year later is 150 pesos per dollar. h) the spot rate a year later is 200 pesos per dollar, \\ c) the spot rate a year later is 250 pesos per dollar, That is, for each of the four strategies, report an amount spent today and three amounts spent a year from now, Where the latter may depend upon the spot rate that prevails a year from now. This is akin to the CNY/USD table on slide 60 from week 8. , The best strategy depends on What the rm expects to happen with the exchange rate a year from now. For each of these scenarios, which is the best strategy? For simplicity, you can compare present and future payments without any discounting of future cash ows. a) Case 1: The rm expects the exchange rate to be 150, 200 or 250 with probabilities 0.60, 0.20, and 0.20, respectively. b) Case 2: The rm expects the exchange rate to be 150, 200 or 250 with probabilities 0.33, 0.33, and 0.33, respectively