Reference no: EM132959848

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: If there is a 50 percent chance that Blustream will receive the government contract, would you advise Blustream to hedge the maximum amount or the minimum amount of revenue that it may receive? Explain.