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!!!)
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Forward market hedge - rate
10y ago#1We 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).
Of course ! Thank you.
10y ago#3You are welcome :-)
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