Suppose a U

question 56

Multiple Choice

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 5.68 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.
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• A) $4,542.43
• B) $5,899.26
• C) $5,309.33
• D) $5,840.26
• E) $6,725.15

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Definitions:

Initial Investment

The amount of money put into a project or investment at the beginning, before any returns are realized.

Inflation

A period when prices in general are rising and the purchasing power of money is declining.

Time Value of Money

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Employee Morale

The overall satisfaction, outlook, and feelings of well-being that an employee holds in the workplace.