question archive Question 1 A British importer need to pay $450,000 in 3 months
Question 1 A British importer need to pay $450,000 in 3 months
Subject:FinancePrice: Bought3
Question 1
A British importer need to pay $450,000 in 3 months. • Exchange rate now: $1.7 - 1.7040:£ • Forward rates $1.6902 - 1.6944:£ • Deposit rates: UK 6% annual , US 5% annual • Borrowing rates: UK 7.5%, US 6.5% annual
a) What is the £ cost of this using a money market hedge?
b) What is the £ cost of this using a forward hedge?
c) Based on the answers above, determine which hedging alternative that you would recommend to the company. Explain why.
Question 2
Cindt owes a supplier €14,000 payable in 3 months time. The current spot rate is €0.8:$1. It can earn 3.0% pa on € deposits and can borrow $ at 5.8% pa. What will be the $ cost of the payment if they set up a money market hedge?
Question 3
A UK company expects to receive a payment of US$800,000 in three months’ time. It wants to hedge this exposure to currency risk using a money market hedge. The spot exchange rate for British pound is $1.9770 – 1.9780. Spot annual interest rates currently available in the money markets are: US dollar British pound Deposits: 4.125% 6.500% Borrowing: 4.250% 6.625% What is the £ cost of this using a money market hedge?
