You will be receiving payment of NP 1 million from a client in Mexico one year from now. The current spot rate for the Peso is 1 NP = US$ 0.077. The current price of Peso futures is 1NP = US$ 0.075. Your expectation of the peso spot rate one year from now is:
Possible Outcome for
|
Future Spot Rate
|
Probability
|
|
0.08
|
5%
|
|
0.075
|
60%
|
|
.07
|
35%
|
The question is whether you should buy the Peso forward, to lock in the existing rate, or wait until the funds are received and then exchange them for dollars.
a) What would be your gain or loss from purchasing Pesos in the forward market under each of the 3 scenarios?
|
Future Spot Rate
|
Gain in US$ From Using Forwards Per Peso
|
|
0.08
|
|
|
0.075
|
|
|
.07
|
|