a. Escuela de Ingles can use currency futures to hedge the business in Mexico. For example, an investor of the school may receive a cash flow of a foreign currency that is denominated on some future date. In the case of the school, all revenue and expenses are denominated in Mexican pesos. By entering an offsetting currency futures position, the individual may then be able to hook the current exchange rate that expires on the date written on the cash flow statement. In Escuela de Ingles’ case, however, the manager may be one of the investors. Say he or she will receive $100,000 (Mexican pesos) on November 1st. The current exchange rate in the futures is $13 Mexican pesos/$ American dollars. The manager can then go about “locking” this exchange rate by selling $100,000 (Mexican pesos) worth of future contracts expiring on November 1st. In this way, the investor is assured an exchange rate of $13/$ regardless of exchange rate fluctuations that occur in the period.
b. The business could also use currency options to hedge the business. As opposed to currency futures, currency options allow the business to have the right to buy or sell the options, enjoy premium payables, retain unlimited profit potential while limiting downside risk, and having the flexibility of the delivery date of the currency. Two options are made readily available: call and put. I would advise the manager to take up a put option, rather than a call option, at first since it requires a short position and