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Answers are given, please provide explanation. Please use the following information to answer the question below: A US firm's Accounts Receivables (from UK) due in
Answers are given, please provide explanation.
Please use the following information to answer the question below: A US firm's Accounts Receivables (from UK) due in 1 year is: GBP 5,000,000 Current Spot rate for GBP is: $2.00 Annual interest rate in US is: 5% Annual interest rate in UK is: 8% l-year Forward rate for GBP is: $1.91 Suppose the firm wants to set up a money market hedge to turn their receivables into USD when it is due. Today, the firm needs to: Borrow GBP from UK bank, sell GBP for USD at current spot rate, invest USD in US bank. Suppose the firm wants to set up a money market hedge to turn their receivables into USD in one year. Today, the firm needs to borrow and invest GBP 4,629,630 ; USD 9,259,259 If the firm uses a MONEY MARKET HEDGE, one year from now, their accounts receivables will give them: USD 9,722,222 If the firm uses a FORWARD HEDGE, one year from now, their accounts receivables will give them: USD 9,550,000 Based on the given information, the firm should use a: money market hedgeStep by Step Solution
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