Reference no: EM132959849

Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 4 million Mexican pesos (MXP) in revenue at the end of the next year. However, it might also receive a contract to provide this technology to the Mexican government. In this case, it will generate a total of MXP6 million at the end of the next year. It will not know whether it will receive the government order until the end of the year.

• Today's spot rate of the peso is $0.14. The one-year forward rate is $0.12. Blustream expects that the spot rate of the peso will be $0.13 one year from now. The only initial outlay will be $400,000 to cover development expenses (regardless of whether the Mexican government purchases the technology). Blustream will pursue the project only if it can satisfy its required rate of return of 18 percent. Ignore possible tax effects. It decides to hedge the maximum amount of revenue that it will receive from the project.

Problem 1: Blustream recognizes that it is exposed to exchange rate risk whether it hedges the minimum amount or the maximum amount of revenue it will receive. It considers a new strategy of hedging the minimum amount it will receive with a forward contract and hedging the additional revenue it might receive with a put option on Mexican pesos. The one-year put option has an exercise price of $0.125 and a premium of $0.012. Determine the NPV if Blustream uses this strategy and receives the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

Problem 2: Also, determine the NPV if Blustream uses this strategy and does not receive the government contract. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.