Business firm buys 200000 worth of stereo speaker wire from Mexican manufacturer for delivery in 60 days with payment to be made in 90 days. The rising Business firm deficit had caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/ dollar. The firm goes into forward market today and buys enough Mexican pesos at the 90-dat forward rate to completely cover its trade obligation. Assume that spot rate in 90 days is 5.40 Mexican pesos per U.S. dollar. How much in US dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Question

Business firm buys 200000 worth of stereo speaker wire from Mexican manufacturer for delivery in 60 days with payment to be made in 90 days. The rising Business firm deficit had caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/ dollar. The firm goes into forward market today and buys enough Mexican pesos at the 90-dat forward rate to completely cover its trade obligation. Assume that spot rate in 90 days is 5.40 Mexican pesos per U.S. dollar. How much in US dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

 

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Exchange Rate Determinants

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