You work for a Space Mountain Rollercoasters, which is a firm whose home currency is the...

 

Transcribed Image Text:

You work for a Space Mountain Rollercoasters, which is a firm whose home currency is the Mexican peso (MXN) and that is considering a foreign investment. The investment yields expected after-tax Turkish lira (TRY) cash flows (in millions) as follows: Year 0 Year 1 -TRY 1,100 TRY625 Government bond yield Expected inflation Project required return Year 2 TRY625 Assume that Covered Interest Rate Parity holds and that your firm's management believes that Relative Purchasing Power Parity is the best way to predict future exchange rates over this investment's time horizon. You also have the following information: MXN O a. The gain from hedging with forwards is MXN 67.56 million O b. The gain from hedging with forwards is MXN 69.21 million O c. The gain from hedging with forwards is MXN 66.37 million O d. The gain from hedging with forwards is MXN 65.42 million O e. The gain from hedging with forwards is MXN 67.92 million Year 3 10.16% p.a. 7.00% p.a. 14.811% p.a. TRY625 TRY 14.24% p.a. 12.00% p.a. 20.176% p.a. The spot exchange rate is SMXN/TRY = MXN 2.8225/TRY. Assume that your firm is unable to find a way to capture the project's Turkish lira value today through mechanisms such as securitizing the project and selling the project to local investors. What is the gain in Mexican peso value that the parent company (Space Mountain Rollercoasters) can expect to receive by hedging the project's cash flows using available forward rates as opposed to leaving the investment unhedged? You work for a Space Mountain Rollercoasters, which is a firm whose home currency is the Mexican peso (MXN) and that is considering a foreign investment. The investment yields expected after-tax Turkish lira (TRY) cash flows (in millions) as follows: Year 0 Year 1 -TRY 1,100 TRY625 Government bond yield Expected inflation Project required return Year 2 TRY625 Assume that Covered Interest Rate Parity holds and that your firm's management believes that Relative Purchasing Power Parity is the best way to predict future exchange rates over this investment's time horizon. You also have the following information: MXN O a. The gain from hedging with forwards is MXN 67.56 million O b. The gain from hedging with forwards is MXN 69.21 million O c. The gain from hedging with forwards is MXN 66.37 million O d. The gain from hedging with forwards is MXN 65.42 million O e. The gain from hedging with forwards is MXN 67.92 million Year 3 10.16% p.a. 7.00% p.a. 14.811% p.a. TRY625 TRY 14.24% p.a. 12.00% p.a. 20.176% p.a. The spot exchange rate is SMXN/TRY = MXN 2.8225/TRY. Assume that your firm is unable to find a way to capture the project's Turkish lira value today through mechanisms such as securitizing the project and selling the project to local investors. What is the gain in Mexican peso value that the parent company (Space Mountain Rollercoasters) can expect to receive by hedging the project's cash flows using available forward rates as opposed to leaving the investment unhedged?

Answer rating: 100% (QA)

The correct answer is b The gain from hedging with forwards is MXN 6921 million To calculate the gai... View the full answer