Forward Hedge Decision
Response to the following problem:
Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected inflation there. Kayla expects that the Mexican peso will depreciate over the next 90 days. Yet, it plans to hedge its payables with a 90-day forward contract.
Why may Kayla believe that it will pay a smaller amount of dollars when hedging than if it remains unhedged?