You believe that IRP presently exists. The nominal annual interest rate in Mexico is 12%. The nominal annual interest rate in the U.S. is 2%. You expect that annual inflation will be about 8% in Mexico and 5% in the U.S. The spot rate of the Mexican peso is $.15 per Mexican peso.

You will receive 1 million Mexican pesos in one year.

Use the following information for the next 8 questions.

UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that 1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%. 2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro. 3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate.

Question 7

0 / 7.14 points

How should UCD utilize the forward market to hedge the exchange rate risk for its future receivables? And what shall be the amount received based on this hedging strategy? (Note: UCD can only buy or sell the forward contract at the forward rate available in the forward market described in bullet 3.)

Question options:

	Buy a one-year forward contract for the amount of 250,000 euros at the forward rate of $1.14. One year later, UCD will fulfill its obligation and receives the amount of $285,000.
	Sell a one-year forward contract for the amount of 250,000 euros at the forward rate of $1.14. One year later, UCD will fulfill its obligation and receives the amount of $285,000.
	Buy a one-year forward contract for the amount of 250,000 euros at the forward rate of $1.20. One year later, UCD will fulfill its obligation and receives the amount of $300,000.
	Sell a one-year forward contract for the amount of 250,000 euros at the forward rate of $1.20. One year later, UCD will fulfill its obligation and receives the amount of $300,000.

If UCD decides to use money market hedging strategy to hedge its receivables, how shall UCD implement the strategy?

Question 8

0 / 7.14 points

Question options:

	UCD should first borrow euros for the amount of 231,481.48 euros. UCD will then go to the foreign exchange market to exchange the amount borrowed into U.S. dollars which yields UCD the amount of $277,777.78. UCD will deposit the amount exchanged at the bank in the U.S.. One year later, UCD will pay off its euro loan using the euro payments received.
	UCD should first borrow euros for the amount of 250,000 euros. UCD will then go to the foreign exchange market to exchange the amount borrowed into U.S. dollars which yields UCD the amount of $300,000. UCD will deposit the amount exchanged at the bank in the U.S.. One year later, UCD will pay off its euro loan using the euro payments received.
	UCD should first borrow U.S. dollars for the amount of 300,000. UCD will then go to the foreign exchange market to exchange the amount borrowed into euros which yields UCD the amount of 250,000 euros. UCD will deposit the amount exchanged at the bank in Europe. One year later, UCD will pay off its U.S. dollar loan by using the euro payments received.
	UCD should first borrow U.S. dollars for the amount of 231,481.48. UCD will then go to the foreign exchange market to exchange the amount borrowed into euros which yields UCD the amount of 250,000 euros. UCD will deposit the amount exchanged at the bank in Europe. One year later, UCD will pay off its U.S. dollar loan by using the euro payments received.