Question

Scenario: On April 2, 2018, a Texas exporter shipped 43,000 pounds of frozen chicken quarters to a Mexican importer at a price of $1.39/lb. The exporter has agreed getting paid on June 2 in Mexican Pesos (MXP) but using April 2nd exchange rates.

Currently, the spot and June futures MXPUSD exchange rates are as follows:

Apr 2 Spot: $0.0549/MXP Apr 2 Jun Futures: $0.0542/MXP

If the exporter was paid on April 2, how much would be received in MXP for the shipment (Please round to nearest MXP - no decimals)?

What payment method has been negotiated and what is the exporter’s concern regarding the exchange rate between April 2 and the scheduled payment on June 2?

Answer 1

If the exporter was paid on April 2, he’d receive 43000*$1.39/ ($0.0549/MXP) = MXP 1088707

(we calculate the value of the contract in terms of MXP)

Total amount exporter would receive if he was paid on 2nd April is $59770

The exporter has agreed to get paid on 2nd June in MXP but using the April 2nd exchange rates. The future price for June future is $0.0542 that is, the USD is expected to appreciate or the MXP is expected to depreciate.

If he were to be paid using the futures exchange rate, we would receive a total sum of:
= MXP 1088707* $0.0542/MXP
= $59007.9194

The exporters concern regarding the exchange rate between April 2 and the scheduled payment on 2nd June could be that the USD is going to appreciate in the future and for the same MXP, he’d receive a lower USD equivalent amount that is why he has agreed on the rate corresponding to 2nd April.