suppose your company who owns a business in Mexico. The currentexchange rate is 22 Mexican...

suppose your company who owns a business in Mexico. The current exchange rate is 22 Mexican pesos per one US dollar. Describe a position in which a forward contract would be beneficial to your company. when would it produce a negative outcome?

Expert Solution

As we own the business in Mexico, we earn revenue in Mexican Pesos and we are exposed to the risk of Mexican Peso being depreciated.

The current exchange rate is 22 Mexican pesos per US dollar. If the exchange rate changes to more than 22 Mexican pesos per US dollar, then we would incur loss.

To hedge against this risk we can enter a forward contract to sell Mexican pesos (same as entering a contract to buy US dollar).

This forward contract would be beneficial to our company if the exchange rate changes to more than 22 Mexican pesos per US dollar.

And, the forward contract would produce a negative outcome to our company if the exchange rate changes to less than 22 Mexican pesos per US dollar. In this case we would be better off without the contract.

jeff jeffy answered 2 years ago

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