Speculation of exchange rate risk and hedging.

At the end of 2002, the (1-year) interest rate was 1% in the U.S., and 26% in Argentina. Recall that at the same time, the spot rate for the Argentine currency was Peso 4.00/$. Yankee Burger expects sale revenues of 200 million Pesos in 2003 from its chain of restaurants in Argentina. These revenues will be collected at end of 2003.

The latest crisis in Argentina is provided, your current boss needs you to hedge (eliminate all exchange risks from) this future transaction (repartition of revenues n dollars) completely.

1.Would you: buy or sell Peso?_____ On the spot market or market?_____ Now or in 1-year?___

2.What was the 1-year forward exchange rate in 2002? Peso_____/$
(HINT: use covered interest rate parity)

3.How much revenue would you receive from your exports? $_______million (round to nearest integer please)

Yankee Burger merges with another burger chain and your new boss allows you to speculate, if you can increase Dollar revenues from its Argentine operations.

If your expected future spot rate for 2003 is equal to Peso 4.00/$, what would be your expected revenue if you waited a year to convert your revenue in US$?

Answer: $__________million (round to nearest integer)

Would you decide to speculate or hedge?_______