Dkny owes 7 million mexican pesos in 30 days for a recent, Financial Management

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Dkny owes 7 million mexican pesos in 30 days for a recent

DKNY owes 7 million Mexican pesos in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:

Spot rate: 13.0 pesos/$

Forward rate (30 days): 13.1 pesos/$

30-day call option on pesos: strike price E=1/12.9=0.07752 $/peso

Premium: 0.00077 $/peso

U.S. dollar 30-day interest rate (annualized): 7.5%

Peso 30-day interest rate (annualized): 15%

(a) What dollar cost of the payable can DKNY lock in using the forward contract?

(b) What is the hedged dollar cost of DKNY’s payable using a money market hedge?

(d) Suppose that DKNY expects the 30-day spot rate to be 13.4 pesos/$. Should it hedge this payable?

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