Question 21.FSE.6: Assume that interest rate parity exists and it will continue...

International Financial Management

Assume that interest rate parity exists and it will continue to exist in the future. The U.S. and Mexican interest rates are the same regardless of the maturity of the interest rate, and they will continue to be the same in the future. Tucson Co. and Phoenix Co. will each receive 1 million Mexican pesos in 1 year and will receive 1 million Mexican pesos in 2 years. Today, Tucson uses a 1-year forward contract to hedge its receivables that will arrive in 1 year. Today it also uses a 2-year forward contract to hedge its receivables that will arrive in 2 years.

Phoenix uses a 1-year forward contract to hedge the receivables that will arrive in 1 year. A year from today, Phoenix will use a 1-year forward contract to hedge the receivables that will arrive 2 years from today. The Mexican peso is expected to consistently depreciate substantially over the next 2 years.
Will Tucson receive more, less, or the same amount of dollars as Phoenix? Explain.

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