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Chalmers Incorporated Chalmers Incorporated long ago did away with selective hedging by its treasury staff. If the date of the transaction is known with certainty, all foreign-currency- denominated cash flows must adhere to the following mandatory forward con- tract cover formula. Any remaining amounts may be left uncovered.
If Chalmers is:
Exposure Coverage Required by Maturity 0-90 days 91-180 days >180 days
"paying the points forward" "receiving the points forward"
Chalmers expects to receive a Mexican new peso payment of Ps.2,000,000 in four months. The spot rate is Ps.10.2400/S, and the four-month forward rate is Ps.11.0400/S:
a. What would be the amount of forward cover required?
b. If at the same time the spot rate in four months was expected to be Ps.8.1920/$, what would lx the amount in pesos covered and uncovered?
C. What would be the expected total end-of-period U.S. dollar value of the position taken in part (b)?
If Chalmers were to make a Mexican new peso payment of Ps.3,000,000 in two months, the spot rate was Ps. 10.3000/S, and the two-month forward rate was Ps.8.800/$:
d. What would be the amount of forward cover required?
e. lithe spot rate in two months was expected to be Ps.10.0000/$, what
would be the peso amount sold forward and the amount left uncovered? E What would be the expected total end-of-period U.S. dollar value of the payment required in part (b)?
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