10. Kayla Co. – Forward Hedge Decision
Kayla Co. imports products from Mexico and will make payment in pesos in 90 days. Even
though Kayla expects the peso to depreciate, it chooses to hedge using a 90-day forward
contract. According to interest rate parity (IRP), the forward rate reflects the expected
depreciation due to Mexico's high interest rate. Kayla believes that locking in the forward rate
protects against any unfavorable movement in the spot rate and may result in paying a smaller
amount of USD, especially if the peso depreciates less than expected.
11. Santa Barbara Co. – Hedging Decision on Payables
Santa Barbara Co. needs to pay 300,000 Malaysian ringgit in 90 days. It can hedge using a
forward hedge or a money market hedge. The 90-day forward rate is $0.400, the spot rate is
$0.404, the 90-day U.S. interest rate is 1% (annual 4%), and the Malaysian rate is 0.75% (annual
3%).
Forward Hedge:
Cost = 300,000 × 0.400 = $120,000 USD
Money Market Hedge:
Step 1: Discount MYR 300,000 at 0.75% for 90 days:
300,000 / 1.0075 ≈ 297,770.70 MYR
Step 2: Convert to USD at spot rate of 0.404:
297,770.70 × 0.404 ≈ $120,014.63 USD
Conclusion: The forward hedge results in a slightly lower cost ($120,000) than the money
market hedge (~$120,015). Thus, the forward hedge is preferable in this case.