Menning Organic Foods of Texas is completing a new assembly plant new Guatemala City. A final constuction payment of Q8,400.000 is due in six-months. ("Q" is the symbol for Guatemalan quetzals). Today foreign exchange and interest rate quotations are as follows: Constructions payment due in 6 months (Account payable quetzals) 8.400.000
Present Spot rate (quetzals/$) 7.0000
6 month expected spot rate (quetzals/$) 7.3000 6 month Forward rate (quetzals/$) 7.1000
Guatemalan 6 month interest rate (per annum) 14%
U.S dollar 6 month interest rate (per annum) 6%
Menning weigted average cost of capital (WACC) 20%
Menning's treasury and finance manager. concerned about the Guatemalan economy, wonders if Mennning should be hedging in foreign exchange risk: What realistic alternatives avallable to Menning for making payments? Which method would you select and why?
