Reference no: EM133028750
Question - Central Valley Transit Inc. (CVT) owes Mexican Peso(MP) 8 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:
Spot rate: MP 19.9/$
Forward rate (30 days) MP 20.15/$
30-day put option on dollars at MP 19.87/$ 1% premium
30-day call option on dollars at MP 20.1/$ 3% premium
U.S. dollar 30-day investing interest rate (annualized): 7.5%
U.S. dollar 30-day borrowing interest rate (annualized): 9.5%
Peso 30-day investing interest rate (annualized): 15%
Peso 30-day borrowing interest rate (annualized): 17%
Cost of capital 10%
Based on the information provided above:
a) Calculate the cost of each hedging alternative available to CVT.
b) Based on your findings in part (a), which hedging alternative(s) would you recommend to CVT? Which factors should CVT consider in making its final decision on choosing the best hedging alternative?
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