What is the gain in Mexican peso value that the parent company (Space Mountain Rollercoasters) can expect to receive by hedging the project's cash flows using available forward rates as opposed to leaving the investment unhedged? O a. The gain from hedging with forwards is MXN 67.56 million O b. The gain from hedging with forwards is MXN 69.21 million O c. The gain from hedging with forwards is MXN 66.37 million O d. The gain from hedging with forwards is MXN 65.42 million O e. The gain from hedging with forwards is MXN 67.92 million
What is the gain in Mexican peso value that the parent company (Space Mountain Rollercoasters) can expect to receive by hedging the project's cash flows using available forward rates as opposed to leaving the investment unhedged? O a. The gain from hedging with forwards is MXN 67.56 million O b. The gain from hedging with forwards is MXN 69.21 million O c. The gain from hedging with forwards is MXN 66.37 million O d. The gain from hedging with forwards is MXN 65.42 million O e. The gain from hedging with forwards is MXN 67.92 million
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 57QA
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Question
Transcribed Image Text:You work for a Space Mountain Rollercoasters, which is a firm whose home currency is the Mexican peso (MXN) and that is considering a foreign investment. The investment yields
expected after-tax Turkish lira (TRY) cash flows (in millions) as follows:
Year 0
Year 1
-TRY1,100
TRY625
Government bond yield
Expected inflation
Project required return
Year 2
TRY625
Assume that Covered Interest Rate Parity holds and that your firm's management believes that Relative Purchasing Power Parity is the best way to predict future exchange rates over
this investment's time horizon. You also have the following information:
MXN
O a. The gain from hedging with forwards is MXN 67.56 million
O b. The gain from hedging with forwards is MXN 69.21 million
O c. The gain from hedging with forwards is MXN 66.37 million
O d. The gain from hedging with forwards is MXN 65.42 million
O e. The gain from hedging with forwards is MXN 67.92 million
Year 3
10.16% p.a.
7.00% p.a.
14.811% p.a.
TRY625
TRY
14.24% p.a.
12.00% p.a.
20.176% p.a.
The spot exchange rate is SMXN/TRY = MXN 2.8225/TRY.
Assume that your firm is unable to find a way to capture the project's Turkish lira value today through mechanisms such as securitizing the project and selling the project to local
investors.
What is the gain in Mexican peso value that the parent company (Space Mountain Rollercoasters) can expect to receive by hedging the project's cash flows using available forward
rates as opposed to leaving the investment unhedged?
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