Archimedes SA’s money market hedge. On December 31, 2014, Archimedes SA, the Philippine affiliate of a U.S. irrigation equipment manufacturing company, is projecting its Philippines peso (PHP)-denominated balance sheet for December 31, 2015, as shown in Exhibit 17. 7. The current exchange rate is PHP 40 = $1.

a. What is the peso translation exposure under the monetaryonmonetary and all-current methods?

b. One-year peso forward contracts are available in the United States at a 9 percent discount. Show how the all-current peso translation exposure can be hedged, assuming that cash-flow exchange losses are tax-deductible at 34 percent from normal corporate income.

c. Explain how refinancing the long-term debt in dollars at 5 percent in lieu of the prevailing 10 percent interest rate on peso-denominated long-term debt would result in an alternative translation hedge. How does it compare with the contractual hedge introduced in part b?

Data from Exhibit 17. 7

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EXHIBIT 17.7 Pro Forma Balance Sheet of Archimedes SA as of December 31, 2015 Assets (PHP '000s) Liabilities (PHP '000s) Cash 60,000 Accounts payable 30,000* Accounts receivable 120,000 Short-term debt 55,000 Long-term debt 200,000 Inventories 120,000 Net fixed assets 240,000 Owners' equity 255,000 540,000 540,000 Denominated in US$ (imports of components from U.S. parent).