In one year's time, a US$-$MNC will receive payment of GBP$5$ million. The current spot rate is USD$1\mathrm{.}234/$GBP$.$ The GBP interest rate $5\mathrm{.}15\%,$ the USD interest rate is $6\mathrm{.}30\%.$ The one$-$year forward rate is USD$1\mathrm{.}153/$GBP$.$ How much better off is the US$-$MNC using a money market hedge compared with a forward contract?

Question $6$Answer

a$.$

USD$5,765,000$

b$.$

The US$-$MNC should be indifferent between using a money market hedge and a forward contract since the value of the hedges for each approach are equal.

c$.$

USD$472,479$

d$.$

USD$338,250$