QUESTION 1 (25 marks) Question 1a (15 marks) AngelParis PLC, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable. AngelParis PLC must pay interest of 5,000,000 pesos in six months time. The following information is available. per $ spot rate pesos 12.500 - pesos 12.582 six month forward rate pesos 12.805 - pesos 12.889 Interest rates that can be used by AngelParis PLC: borrow deposit peso interest rate 10.0% per year 7.5% per year dollar interest rate 4.5% per year 3.5% per year You are required to: Calculate whether a forward market hedge or a money market hedge should be used to hedge the interest payment of 5 million pesos in six months time. Assume that AngelParis PLC would need to borrow any cash it uses in hedging exchange rate risk.

Question 1b (10 marks) Explain the basic differences between the operation of a currency forward market and a futures market.