Question

OVL auestion for Quiz #22: Module 11 Problems Questiorn Status 1.24 PM Exxon Oil Corp is negotiating the purchase of 1 million barrels of oil from a wants the contract expressed in Mexican Pesos, and the current "in USD" Peso exchange rate is $0.073 The contract is signed at a price of 1405 Pesos per barrel. Exoxon can enter a futures contract that allows the company to purchase Pesos at the exact time of oil delivery at $0.074. If we consider the use of the futures contract to hedge Exxon's foreign exchange risk, how much is the cost of this insurance to Exxon? compebitor to be delivered and paid for in exactly 1 year The oil exporter Note: Round your answer to the closest SUSD CHECK ANSWER

Answer 1

Barrels to purchase = 1 million

The contract is signed at =1405 pesos per barrel

Total purchase price = no of barrels * price per barrel = 1 million * 1405 pesos = 1405 million pesos

Current "in USD" exchange rate is $0.073

Future "in USD" rate is $0.074

Cost of insurance for 1 pesos = future rate - current rate = $0.074 - $0.073 = $0.001

Cost of insurance for 1405 milion pesos = 1405 million * 0.001 = 1.405 million$ = $1,405,000