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ZPS Co must pay interest on the dates set by the bank. A payment of 5,000,000 pesos is due in six months’ time. The
following information is available:
Spot rate 12·500–12·582 pesos per $
Six-month forward rate 12·805–12·889 pesos per $What is the dollar cost of a forward market hedge?
I thought the answer would have been $387,928 @ 12.889 pesos as this would give a worse rate converting to US$ ie. $387,928. Why is the answer 12.805 giving $390,472?
(sorry for all my q’s …just clearing my final q’s!!!)
We are paying money and therefore it is whatever is worse for us!
If we are paying pesos we use 12.805 which gives the biggest amount payable; if we were receiving pesos we would use 12.889 (which would give the worst (lowest) receipt).
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