(hedging) International company (IC), whose home currency is the dollar, took out a fixed-interest..
(hedging) International company (IC), whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relaively stable. IC must pay interest of 5,000,000 pesos in six months' time. The following information is available: 20.45 USD/MXN Spot rate: 6-month forward rat 20.90 USD/MXN nterest rates available for IC are as follows: Peso interest rates: Dollar interest rates: Borrow 10.0% per year 4.5% per year Deposit 75% per year 35% per year Questions: a) Try to explain what the nature of exchange rate risk here and why IC might consider hedging? Now assume that there are two possibilities to hedge against exchange rate risk. 1t Option is based on money market hedge: e.g. the company borrows certain amount of home currency, converts it into pesos and this way hedges against exchange rate risk 2nd Option is based on forward hedge: e.g. the company buys a forward contract today to hedge against exchange rate risk. b) Your task is to find, which alternative has cheapest cost in terms of dollars 6-months from now (e.g. when interest payment in pesos is made)? Apr 08 2022 02:04 PM
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more