Forecasting with IFE and Hedging Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables at this time. However, in three months, it will be able to obtain a one-year (12-month) forward contract to hedge its receivables. Today the three-month U.S. interest rate is 2 percent (not annualized), the 12 -month U.S. interest rate is 8 percent, the 3-month Mexican peso interest rate is 5 percent (not annualized), and the 12 -month peso interest rate is 20 percent. Assume that interest rate parity and the international Fisher effect exist. Assume that the existing interest rates are expected to remain constant over time. The spot rate of the Mexican peso today is $0.10. Based on this information, estimate the amount of |dollars that Calumet Co. will receive in 15 months.

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 37QA
Textbook Problem

Forecasting with IFE and Hedging Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables at this time. However, in three months, it will be able to obtain a one-year (12-month) forward contract to hedge its receivables. Today the three-month U.S. interest rate is 2 percent (not annualized), the 12 -month U.S. interest rate is 8 percent, the 3-month Mexican peso interest rate is 5 percent (not annualized), and the 12 -month peso interest rate is 20 percent.

Assume that interest rate parity and the international Fisher effect exist. Assume that the existing interest rates are expected to remain constant over time. The spot rate of the Mexican peso today is $0.10. Based on this information, estimate the amount of |dollars that Calumet Co. will receive in 15 months.

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