Assume that you have decided to hedge future payables that are coming from Mexico to a...

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Assume that you have decided to hedge future payables that are coming from Mexico to a...

Assume that you have decided to hedge future payables that are coming from Mexico to a US MNC. How would the US MNC hedge these payables? Please use numbers.

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Answer 1

Answer #1

The US MNC would hedge by selling the Mexican peso forward, or by selling Mexican Peso futures.

Let us say the US MNC is to receive 100,000 pesos in 3 months. Now, let us also assume that the US MNC can sell the Mexican peso forward/future at $0.053 per peso. By selling the forward/future contract, the amount of USD receivable after 3 months if fixed at 100,000 * 0.053 = USD 5,300.

The spot exchange rate after 3 months is not relevant. By selling the forward/future contract, the US MNC has hedged its dollar amount by locking-in to the exchange rate of $0.053 per peso.

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Answer 2

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