Question

A US exporter is due to deliver product in Mexico in six months and receive payment in Mexican pesos. Which transaction presented below could eliminate the importer’s exchange risk?

Answer 1

Ideally there wont be any risk of exhange on importer as the transaction is in his local currency (Import is in Mexico & the payment is also in Mexican pesos. Hence no conversion needed realistically)

Assuming there is an exchange rate risk on the mexican side if the exchange rate moves agaisnt him when the payment arrives. This risk is if the pesos value goes down compared to US $ (risk is assumed that mexican importer runs the books on other currency & not Pesos) which will they required him to give more pesos in relative $ terms than today. To hedge the same, the importer can enter into derivative trade wherein he can Buy USD/Mexican peso currency forward contract or Buy a USD/Mexican peso currency call option. This will lock in his rate at the exhcnage rate prevalent on the date of contract & thus eliminate his relative risk.