Question

• Emma plans to import a car from England on 1 March 2017. Confronting with two alternatives, she has been making a decision regarding which date that her payment should be made.
• The first option is to convert her Mexican peso into £100,000 and make a payment on 1 March 2017, with the expectation that Mexican peso would appreciate by 1.5% from 1 January 2017 to 1 March 2017.
• The second option is to sign the 90-day forward contract on 1 March 2017 to pay £100,000 to the British seller. The 90-day forward rate, quoted in terms of Mexican peso value of British pound, is expected to be 33.557.

(a) Illustrate the differences between the payments made on two different dates by calculating the required amount of Mexican peso.

(b) Specifically recommend one payment date which is considered a more economical option for Emma.

Answer 1

let us understand and answer this problem with the context to the rupee outflow in foreign currency and we will be selecting the alternative in which the rupee outflow in foreign curreny is less.

OPTION 1. CONVERSION

POUND 100000 Appreicated 1.5% i.e total profit= 1500

therefore net cash outflow= 100000-1500= 98500.

OPTION 2. FORWARD CONTRACT

net cash outflow= 100000

hence as per this information given alternative 1 is better ,

MORE INFORAMTION WITH RESPECT TO THE CURRENT RATE OF MEXICAN PESO AND POUND IS REQUIRED TO ENABLE A BETTER FORMULATION OF THE ANSWER.