1. Montclair Co., a U.S. firm, plans to use a money

market hedge to hedge its payment of 3 million Australian

dollars for Australian goods in 1 year. The U.S.

interest rate is 7 percent, while the Australian interest

rate is 12 percent. The spot rate of the Australian dollar

is $.85, while the 1-year forward rate is $.81. Determine

the amount of U.S. dollars needed in 1 year if a money

market hedge is used.

A$3000000/1+.12

2678571*.85

2279785*1.07

answer= $2,436,160.00

2. Using the information in the previous question,

would Montclair Co. be better off hedging the payables

with a money market hedge or with a forward hedge?

3. Using the information about Montclair from the

first question, explain the possible advantage of a currency

option hedge over a money market hedge for

Montclair Co. What is a possible disadvantage of the

currency option hedge?