Question
XYZ Ltd, a UK company, is due to pay 360,000 NAf(Dutch guilders) in 3months time to BIVA a supplier in the Netherlands. The relevant rates
XYZ Ltd, a UK company, is due to pay 360,000 NAf(Dutch guilders) in 3months time to BIVA a supplier in the Netherlands. The relevant rates are as follows: (30 marks)
Money market rates (%per year)
Deposit Borrowing
UK 4% 10%
Netherlands 5% 9%
Spot rates, NAf/: 2.7200 -2.7350
- Demonstrate how XYZ Ltd can use the money market to hedge the currency risk.
Assuming the funds are obtained by borrowing sterling calculate the sterling cost of the transaction in three monthstime.
- If the bank can offer a three month forward contract, the price is NAf/: 2.8000 2.8200, which strategy is better? (compare to the answer in part a)
- Any other hedging strategies recommend?
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Financial Econometrics
Authors: Peijie Wang
1st Edition
0415426693, 978-0415426695
