Coleman Co., an Australian company, will pay 2.15 million Malaysian ringgit (MYR) to its' Malaysian supplier in one-year. To avoid transaction exposure, the company wants to take the money market hedge strategy using the spot rate A$0.3536/MYR and 5.17% deposit rate of MYR. What is the cost of money market hedge for Coleman Co. with 4.05% borrowing rate of A$? (enter the whole number without sign or symbol).

 

Cost of money market hedge for Coleman Co = A$752,144 (Rounded off to Whole number)

Step-by-step explanation

• Amount Payable = MYR 2.15 million = MYR 2,150,000

• Time Period = 1 year

• Spot rate A$/MYR = A$0.3536/MYR 

• Deposit Rate in MYR = 5.17% p.a. 

• Borrowing rate of A$= 4.05% p.a.

Calculation of cost of money market hedge for Coleman Co.

Step 1) Purchase Present Value of MYR2,150,000 today in place of buying it after 1 year and deposit it @5.17%p.a. for 1 year

So, Investment amount today = PV of MYR2,150,000 @ 5.17% = (2,150,000/1.0517) = MYR 2,044,309.21365

Step 2) Purchase MYR 2,044,309.21365 Today @ spot rate of A$0.3536/MYR and Outflow in Australian Dollar = 2,044,309.21365 *0.3536 = A$722867.7379

Step 3) Borrow A$722867.7379 toady @ 4.05% p.a. for 1 Year

Outflow after 1 year = 722867.7379 *1.0405 = A$752143.881332

So, cost of money market hedge for Coleman Co = A$752,144 (Rounded off to Whole number)