# PPP and Hedging with Call Options Visor, Inc. (a U.S. firm), has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argentina is 19 percent, versus 6 percent in the United States. You expect that annual inflation will be about 11 percent in Argentina and 4 percent in the United States. The spot rate of the Argentine peso is \$0.30. Call options on pesos are available with a one-year expiration date, an exercise price of \$0.29, and a premium of \$0.03 per unit. Determine the expected amount of dollars that you will pay from hedging with call options (including the premium paid for the options) if you expect that the spot rate of the peso will change over the next year based on purchasing power parity (PPP).

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 11, Problem 50QA
Textbook Problem

## PPP and Hedging with Call Options Visor, Inc. (a U.S. firm), has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argentina is 19 percent, versus 6 percent in the United States. You expect that annual inflation will be about 11 percent in Argentina and 4 percent in the United States. The spot rate of the Argentine peso is \$0.30. Call options on pesos are available with a one-year expiration date, an exercise price of \$0.29, and a premium of \$0.03 per unit. Determine the expected amount of dollars that you will pay from hedging with call options (including the premium paid for the options) if you expect that the spot rate of the peso will change over the next year based on purchasing power parity (PPP).

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