Use currency put option hedge

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Reference no: EM132038443

You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%. The nominal annual interest rate in the U.S. is 3%. You expect that annual inflation will be about 4% in Mexico and 5% in the U.S. The spot rate of the Mexican peso is $.10. Put options on pesos are available with a one-year expiration date, an exercise price of $.105, and a premium of $0.014 per unit. You will receive 1 million pesos in one year.

A-Determine the amount of dollars that you will receive if you use a forward hedge.

B-Determine the expected amount of dollars that you will receive if you do not hedge and believe in purchasing power parity (PPP).

C-Determine the amount of dollars that you will expect to receive if you use a currency put option hedge. Account for the premium you would pay on the put option.

Reference no: EM132038443

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