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Answers are given, please provide explanations. Please use the following information to answer the question below: A US firm's Accounts Payables (in UK ) due
Answers are given, please provide explanations.
Please use the following information to answer the question below: A US firm's Accounts Payables (in 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 $1.98 Suppose the firm wants to set up a money market hedge to meet their payables in USD when it is due. Today, the firm needs to: Borrow USD from US bank, buy GBP with USD at current spot rate, invest GBP in UK bank. O Suppose the firm wants to set up a money market hedge to meet their payables in USD in one year. Today, the firm needs to borrow and invest USD 9,259,259 ; GBP 4,629,630|| . If the firm uses a MONEY MARKET HEDGE, one year from now, their accounts payable will cost them: USD 9,722,222 If the firm uses a FORWARD HEDGE, one year from now, their accounts payable will cost them: USD 9,900,000 . Based on the given information, the firm should use a: money market hedgeStep by Step Solution
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