The spot exchange rate is 10 Mexican pesos (MXP) per U.S. dollar. Today is November 4. The

Question:

The spot is 10 Mexican pesos (MXP) per U.S. dollar. Today is November 4. The three-month interest rates are 12 percent in pesos and 8 percent in dollars. A Mexican peso call traded in Chicago with a of $0.10 per peso has a premium of SO.005. The peso call gives the right to buy one peso for a of $0.10. A Mexican peso put traded in Chicago with a of $0.10 per peso has a premium of $0.0062. The size of the option contract is MXP 500,000. Both calls and puts can be exercised on February 4 (in three months).
a. What is the three-month forward $:MXP?
b. You are Mexican and will receive $1 million U.S. on February 4. Should you buy or sell pesos forward to hedge your future dollar cash flow? How many pesos will you get on February 4 if you hedge?
c. Should you buy or sell peso calls or puts to insure your cash flow? Assuming that you have some cash available to buy the options, how many option contracts should you buy? Calculate the resulting peso cash flows on February 4 for spot exchange rates of 8, 9, 9.5, 10, 10.5, 11, and MXP12/$. Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...