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One-year forward contract to hedge the receivables

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Reference no: EM132641700

Assume that interest rate parity exists and will continue to exist in the future. The U.S. and Mexican interest rates are the same regardless of the maturity of the interest rate, and they will continue to be the same in the future. Tucson Co. and Phoenix Co. will each receive 1 million Mexican pesos in one year and will receive 1 million Mexican pesos in two years. Today, Tucson uses a one-year forward contract to hedge its receivables that will arrive in one year. Today it also uses a two-year forward contract to hedge its receivables that will arrive in two years. Phoenix uses a one-year forward contract to hedge the receivables that will arrive in one year. A year from today, Phoenix will use a one-year forward contract to hedge the receivables that will arrive two years from today. The Mexican peso is expected to consistently depreciate substantially over the next two years. Will Tucson receive more, less, or the same amount of dollars as Phoenix? Explain.

Reference no: EM132641700

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