AnalyzingForeign Currency Hedges
The Arizona Company, aU.S.-based manufacturer, ordered a piece of equipment from SonoraInc., a Mexico-based supplier, agreeing to pay 300,000 Mexicanpesos upon delivery of the equipment in three months time. At thetime of the contract signing, the exchange rate between the U.S.dollar and the Mexican peso was 10P:$1.
With concerns about aweakening U.S. dollar, The Arizona Company decided to hedge itscurrency exposure by purchasing a forward foreign exchange contractfrom a local bank.
The forward contractcommitted The Arizona Company to pay $30,300 in three months inexchange for 300,000 pesos.
What was the forwardforeign exchange rate implicit in the contract (assuming notransaction costs)?
Round to two decimalplaces. Hint - provide the number of Pesos to each US$.
1.)__________________
If the foreignexchange rate in three months was 9.8P:$1, how much did The ArizonaCompany save by purchasing the currency hedge?
Round to the nearestdollar.
2.)________________
If the foreignexchange rate in three months was 9.0P:$1?, how much did thecompany save by purchasing the currency hedge?
Round answer to thenearest dollar.
3.)__________________
