You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%. The nominal annual interest rate in the U.S is 3%. You expect that the annual inflation will be about 4% in Mexico and 5% in the U.S. the spot rate of the Mexican pesos is $ .10 . Put options on pesos are available with a one year expiration date, an exercise price of $ .1008 , and a premium of $ 0.014 per unit. You will receive 1 million pesos in one year.
Determine the amount of dollars that you will receive if you use a forward hedge?
Determine the expected amount of dollars that you will receive if you do not hedge and believe in purchasing power parity.