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A US company expects to receive 1 million euros in 1 year. With the following assumptions, would the company be better off with a money
- A US company expects to receive 1 million euros in 1 year. With the following assumptions, would the company be better off with a money market hedge or a put options hedge. Show workings for each.
- The existing spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. The US Company expects the spot rate of the Euro to be $1.22 in 1 year.
- 1 year put options on euros are available, with an exercise price of $1.23 and a premium of $0.04 per unit.
- The deposit rates for the US are 8% per annum whereas they are 5% per annum for the Eurozone
- The Borrowing rates for the US are 9% per annum whereas they are 6% per annum for the Eurozone
(3 marks)
- As an importer of grain into Japan from the United States, you have agreed to pay USD 377,287 in 90 days after you receive your grain. You face the following exchange rates and interest rates:
spot rate, 106.35/$
90-day forward rate 106.02/$
90-day USD interest rate, 3.25% p.a
90-day JPY interest rate, 1.9375% p.a.
Would the company be better off with a forward hedge or a money market hedge? Support your answers with any appropriate calculations.
(3 marks)
- A UK based firm, will need USD 200,000 in 180 days for an accounts payable. Here, we will denote USD = $ and UK pound = . The firm considers using a forward hedge or a money market hedge. Assume the following information:
180-day deposit rate | 4.5% (UK) 4.0% (US) |
180-day borrowing rate
| 5.5% (UK) 5.0% (US) |
180-day forward rate
| 0.61/$ |
Current spot rate
| 0.60/$ |
Would the firm be better off with a forward hedge or a money market hedge? Show workings for each. (4 marks)
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