Long-Term Hedging with Forward Contracts Tampa Co. will build airplanes and export them to Mexico for delivery in 3 years. The total payment to be received in 3 years for these exports is 900 million pesos. Today the peso’s spot rate is $.10. The annual U.S. interest rate is 4 percent, regardless of the debt maturity. The annual interest rate in Mexico is 9 percent regardless of the debt maturity. Tampa plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists. Determine the dollar amount that Tampa will receive in 3 years.
Long-Term Hedging with Forward Contracts Tampa Co. will build airplanes and export them to Mexico for delivery in 3 years. The total payment to be received in 3 years for these exports is 900 million pesos. Today the peso’s spot rate is $.10. The annual U.S. interest rate is 4 percent, regardless of the debt maturity. The annual interest rate in Mexico is 9 percent regardless of the debt maturity. Tampa plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists. Determine the dollar amount that Tampa will receive in 3 years.
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 1ST
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Long-Term Hedging with Forward Contracts Tampa Co. will build airplanes and export them to Mexico for delivery in 3 years. The total payment to be received in 3 years for these exports is 900 million pesos. Today the peso’s spot rate is $.10. The annual U.S. interest rate is 4 percent, regardless of the debt maturity. The annual interest rate in Mexico is 9 percent regardless of the debt maturity. Tampa plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists. Determine the dollar amount that Tampa will receive in 3 years.
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