Consider a US firm expecting its Australian client to pay the firm 200,000 Australian dollars (AUD) in one year from today. The firms foreign exchange hedging policy has been to rely on money market instruments whenever possible. The spot price of AUD today is $0.75. The current interest rate prevailing in Australia is 5%, p.a.

a) If the firm wants to fix the exchange rate at the current spot price, what would be the amount of cash in AUD the firm must borrow today? (Hint: find the present value of the cash inflow expected in one years time)

b) Assume the firm invests in a US dollar-denominated deposit at an interest rate of 5%, p.a. Describe specifically how the firm should implement its money market hedging. What is the amount of funds, in US dollars, the firm expects to obtain in one year as the result of the hedging?