Madison Co. conducts business in Mexico and expects to need Ps2,000,000 to cover expenses. Madison may receive Ps 3,000,000 or Ps 1,000,000 in one month. The current spot rate is $.09/Ps. If Madison Co. has excess pesos it will convert them to dollars. If Madison Co. does not have enough pesos in one month, it will use dollars to obtain the amount that it needs. Currently, call options for pesos with expiration date in one month are available with a strike price of $.09 and a premium of $.004 per peso. Put options for pesos with expiration date in one month are available with a strike price of $.09 and a premium of $.005 per peso. Madison would like to hedge its exchange rate risk.

If Madison Co. receives Ps 3,000,000 in one month and the peso appreciates to $.12/Ps, what would the company receive in U.S. dollars by hedging with currency straddle?

Answer rating: 100% (QA)

To hedge its exchange rate risk using a currency straddle Madison Co will purchase both a call option and a put option on the peso with the same strik... View the full answer