Long-Term Hedging with Forward Contracts
Response to the following problem:
Tampa Co. will build airplanes and export them to Mexico for delivery in 3 years. The total payment to be received in 3 years for these exports is 900 million pesos. Today the peso's spot rate is $.10. The annual U.S. interest rate is 4 percent, regardless of the debt maturity. The annual interest rate in Mexico is 9 percent regardless of the debt maturity. Tampa plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists. Determine the dollar amount that Tampa will receive in 3 years.