Forecasting with IFE and Hedging
Response to the following problem:
Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables at this time. However, in 3 months, it will be able to obtain a 1-year (12-month) forward contract to hedge its receivables. Today the 3-month U.S. interest rate is 2 percent (not annualized), the 12-month U.S. interest rate is 8 percent, the 3-month Mexican peso interest rate is 5 percent (not annualized), and the 12-month peso interest rate is 20 percent. Assume that interest rate parity exists. Assume the international Fisher effect exists. Assume that the existing interest rates are expected to remain constant over time. The spot rate of the Mexican peso today is $.10.
Based on this information, estimate the amount of dollars that Calumet Co. will receive in 15 months.