Question

The Arizona Company, a U.S.-based manufacturer, ordered a piece of equipment from Sonora Inc., a Mexico-based supplier, agreeing to pay 300,000 Mexican pesos upon delivery of the equipment in three months time. At the time of the contract signing, the exchange rate between the U.S. dollar and the Mexican peso was 10P:$1.

With concerns about a weakening U.S. dollar, The Arizona Company decided to hedge its currency exposure by purchasing a forward foreign exchange contract from a local bank.

The forward contract committed The Arizona Company to pay $30,300 in three months in exchange for 300,000 pesos.

What was the forward foreign exchange rate implicit in the contract (assuming no transaction costs)?

Answer 1

the forward contract rate is 9.9P = 1 USD

Step-by-step explanation:

at contract 300,000 pesos at 10:1

When Arizone hedged a forward it is paying 30,300 for the 300,000 pesos so the implicit rate is not 10:1 as it would be paying 30,000 not 30,300

So we calcualte the rate:

pesos/dollars

300,000 / 30,300 = 9.900

the forward contract rate is 9.9P = 1 USD