Question 1 A British importer need to pay $450,000 in 3 months. Exchange rate now: $1.7 - 1.7040: Forward rates $1.6902 - 1.6944: Deposit rates: UK 6% annual , US 5% annual Borrowing rates: UK 7.5%, US 6.5% annual

a) What is the cost of this using a money market hedge?

b) What is the cost of this using a forward hedge?

c) Based on the answers above, determine which hedging alternative that you would recommend to the company. Explain why. Question 2 Cindt owes a supplier 14,000 payable in 3 months time. The current spot rate is 0.8:$1. It can earn 3.0% pa on deposits and can borrow $ at 5.8% pa. What will be the $ cost of the payment if they set up a money market hedge? Question 3 A UK company expects to receive a payment of US$800,000 in three months time. It wants to hedge this exposure to currency risk using a money market hedge. The spot exchange rate for British pound is $1.9770 1.9780. Spot annual interest rates currently available in the money markets are: US dollar British pound Deposits: 4.125% 6.500% Borrowing: 4.250% 6.625% What is the cost of this using a money market hedge?