A Mexican company is evaluating alternatives to hedge its accounts receivable in US$ due in three...

A Mexican company is evaluating alternatives to hedge its accounts receivable in US$ due in three months. A futures hedge for this transaction will be

Group of answer choices

buying a Peso futures contract.

buying a US$ futures contract.

selling a Peso futures contract.

selling a US$ futures contract.

Expert Solution

Here as we know that Mexican Company has accounts receivables in US$ due in three months, which means that US $ is a foreign currency and the home currency of Mexico is Peso.

So, in this case the company is evaluating the alternatives to hedge the Account receivable because it fears that the fluctuation in price of US$ against Mexican Peso can lead to loss for the company if it falls beyond the spot rate.

Spot rate is the rate at which the home currency can be converted into foreign currency.

So, in order to hedge the risk of future changes in the value of US $, assuming that US $ appreciates in value against the Mexican Peso which can lead to losses can be forgone if the company purchases the US$ future contract.

As the future contract lays down the fixed rate of conversion from US $ to Mexican Peso and the fluctuation in prices doesn't impacts the future contract. So the risk of loss can be avoided.

Also it should be kept in mind that to hedge against the risk of receivables from foreign country, the future contracts of foreign currency are purchased.

Therefore the future contract of US $ should be purchased.

Hence the correct answer is option (b)

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jeff jeffy answered 1 year ago

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