Due to your import of wine from France, you have an account payable in four months. You desire to hedge this account using the money market strategy. The following info are available to you. Calculate the outcome of this strategy at the end of the four months.

Spot rate = $1.116/euro

Account payable amount = euro 50,000.00

Commercial interest rate on US dollar = 4.5 percent (borrowing or lending)

Commercial interest rate on euro = 3.0 percent (borrowing or lending)

The firm will not be affected due to taking extra leverage.

Review the following questions. .

1.Your outcome at the end of the period will be (do NOT use $ sign with your answer):

2.Your outcome at the beginning of the period will be (do NOT use $ sign with your answer):

3.Your outcome in this strategy at the end of the period will be :

a.Certain

b.Uncertain

c.Unknown

d.It depends on other factors

4.Your outcome in this strategy at the end of the period:

a.Will bear a considerable loss

b.Will entail some extra gain

c.Will be somewhat certain and partially uncertain

d.None of the answers in this question is correct.

5.Your outcome in this strategy at the end of the period will depend at the spot exchange rate at the end of the fourth month.

Agree / disagree

6.This strategy (=MM Hedge) is far better than forward hedge since its risk is lower.

Agree/Disagree