Forward Hedge Decision Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected inflation there. Kayla expects that the Mexican peso will depreciate over the next 90 days, yet it plans to hedge its payables with a 90 -day forward contract. Why may Kayla believe that it will pay a smaller amount | of dollars when hedging than if it remains unhedged?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 11, Problem 10QA
Textbook Problem

Forward Hedge Decision Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected inflation there. Kayla expects that the Mexican peso will depreciate over the next 90 days, yet it plans to hedge its payables with a 90 -day forward contract. Why may Kayla believe that it will pay a smaller amount | of dollars when hedging than if it remains unhedged?

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