Jabes Plc is an American company, it exports electronic gadgets to Chile and imports raw materials in return. Jabes Plc is concerned about its risk exposure from its international transactions and is considering its risk management options. The following transactions in the specified currencies are due in six months’ time, the company has decided to hedge its currency exposure. The short-term interest rate for lending in Chile is 8%, the equivalent rate in the United States is 3%. The rates on deposits in Chile are 6.50% per year and 3.50% per year in the United States. Purchase of goods, cash payment due in 3 months $100,000 Sale of finished goods, cash receipt due in 3 months 30,000,000 Pesos Purchase of goods, cash payment due in 6 months 50,000,000 Pesos Jabes Plc has also provided the following relevant exchange rates:

Exchange rates: Bid Ask

Peso/USD Spot rate 635.93 640.10

Three months forward rate 635.77 637.22

Six months forward rate Peso/USD 651.44 655.73

a) Calculate the expected dollar receipts/payments in three months and six months for Jabes Plc if the company uses both the forward market and the money market to hedge its exposure to risk. Based on your calculations, make a recommendation to Jabes Plc as to whether they should use the forward market or the money market to hedge their exposure to risk.

Answer rating: 100% (QA)

Coiuen paye Interest Rate Combry repogit Borrowing A menica 351 Chile 65 particulur ... View the full answer