1. You believe that IRP presently exists, whereas the nominal annual interest rate in Mexico is 14%. The nominal annual interest rate in the U.S. is 3%. You expect that annual inflation will be about 4% in Mexico and 5% in the U.S. The spot rate of the Mexican peso is $.10. Put options on pesos are available with a one-year expiration date, an exercise price of $.1008, and a premium of $0.014 per unit.

You will receive 1 million pesos in one year.

1. Determine the amount of dollars that you will receive if you use a forward hedge. 3 Marks
2. Determine the expected amount of dollars that you will receive if you do not hedge and believe in purchasing power parity (PPP). 3 Marks
3. Determine the amount of dollars that you will expect to receive if you use a currency put option hedge. Account for the premium you would pay on the put option. 4 Marks