Suppose a U.S.firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.52 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge? Do not round the intermediate calculations and round the final answer to the nearest cent.

Question

Suppose a U.S.firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.52 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge? Do not round the intermediate calculations and round the final answer to the nearest cent. ​

Quizplus · Accepted Answer

By hedging in the forward market, the firm locks in an exchange rate of 5.45 pesos per dollar for its $200,000 obligation. Without hedging, the firm would have to buy pesos at the spot rate of 5.30 pesos per dollar in 90 days. The calculation for savings is as follows:1. Amount needed in pesos to cover the obligation: $200,000 * 5.52 = 1,104,000 pesos.2. Amount in dollars hedged at the 90-day forward rate: 1,104,000 / 5.45 = $202,568.81.3. Amount in dollars without hedging at the 90-day spot rate: 1,104,000 / 5.30 = $208,301.89.4. Savings by hedging: $208,301.89 - $202,568.81 = $5,733.08.