ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. ZPS Co does not have any income in pesos. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable. ZPS Co must pay interest on the dates set by the bank. A payment of 5,000,000 pesos is due in six months’ time. The following information is available: Spot rate 12.500 to 12.582 pesos per $ Six-month forward rate 12.805 to 12.889 pesos per $ Interest rates which can be used by ZPS Co: Borrow Deposit Peso interest rates 10.0% per year 7.5% per year Dollar interest rates 4.5% per year 3.5% per year Required What is the dollar cost of a forward market hedge?
ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. ZPS Co does not have any income in pesos. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable. ZPS Co must pay interest on the dates set by the bank. A payment of 5,000,000 pesos is due in six months’ time. The following information is available: Spot rate 12.500 to 12.582 pesos per $ Six-month forward rate 12.805 to 12.889 pesos per $ Interest rates which can be used by ZPS Co: Borrow Deposit Peso interest rates 10.0% per year 7.5% per year Dollar interest rates 4.5% per year 3.5% per year Required What is the dollar cost of a forward market hedge?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. ZPS Co does not have any income in pesos. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable.
ZPS Co must pay interest on the dates set by the bank. A payment of 5,000,000 pesos is due in six months’ time. The following information is available:
| Spot rate | 12.500 to 12.582 pesos per $ |
| Six-month forward rate | 12.805 to 12.889 pesos per $ |
Interest rates which can be used by ZPS Co:
| Borrow | Deposit | |
| Peso interest rates | 10.0% per year | 7.5% per year |
| Dollar interest rates | 4.5% per year | 3.5% per year |
Required
What is the dollar cost of a forward market hedge?
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