Forward hedge or a money market hedge

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Kanab Co. and Zion Co. are U.S. companies that engage in much business within the U.S. and are about the same size. They both conduct some international business as well. Kanab Co. has a subsidiary in Canada that will generate earnings of about C$20 million in each of the next 5years. Kanab Co. also has a U.S. business that will also receive about C$1 million (after costs) in each of the next 5years as a result of exporting products to Canada that are denominatedin Canadian dollars.

Zion Company has a subsidiary in Mexico that will generate earnings of about 1 million pesos in each of the next 5years. Zion Co. also has a business in the U.S. that will receive about 300 million pesos (after costs) in each of the next 5years as a result of exporting products to Mexico that are denominatedin Mexican pesos.

The salvage value of Kanab's Canadian subsidiary and Zion's Mexican subsidiary will be zero in 5 years. The spot rate of the Canadian dollar is $.60 while the spot rate of the Mexican peso is $.10. Assume the Canadian dollar could appreciate or depreciate against the U.S. dollar by about 8% in any given year, while the Mexican peso could appreciate or depreciate against the U.S. dollar by about 12% in any given year.

Which company is subject to a higher degree of translation exposure? Explain.

1. Assume the following information: 90-day U.S. interest rate = 1.5% 90-dayPhilippine interest rate = 3% 90-dayforward rate of Philippine peso = $0.020 Spot rate of Philippine peso = $0.025

Assume your firm in the United States will need 300,000,000 Philippine pesos in 90 days. It wishes to hedge this payables position.

Would it be better off using a forward hedge or a money market hedge? Provide the mathematical analysis to justify your position.

Reference no: EM132137111

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