Pax Americana hedges its Mexican peso translation exposure (B). Referring to Pax Americana’s translation exposure described in problem 1:

a. Identify the alternative hedging methods available to Pax Americana.

b. Show how Pax Americana could hedge its MXN exposure if one-year peso forward contracts trade at MXN 14 = US$1.

c. What is the cost of hedging through forward contracts? Is this taxdeductible?

d. An alternative approach is for Mexicana Ltd. to borrow Mexican pesos and convert them immediately to U.S. dollars. Explain how the latter approach effectively eliminates Pax Americana’s exposure in pesos. What is the cost of this approach, assuming that pesos can be borrowed/lent at 8. 5 percent per annum and U.S. dollars return 3. 5 percent annually on the Eurodollar market?

e. Which hedging method should Pax Americana select? Compare the two methods graphically.

Data from problem 1

Pax Americana measures its Mexican peso translation exposure (A). The U.S.-

based multinational Pax Americana Inc. is concerned by the impact of the anticipated Mexican peso devaluation upon its net consolidated earnings, as well as on the net worth of its Mexican affiliate Mexicana Ltd., whose pro forma balance sheet for December 31, 2014, is listed in Exhibit 17. 6. On January 1, 2014, the prevailing spot Mexican peso (MXN) price of one US$ is MXN 12. 5 = US$1.