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Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 British pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, and the 180-day forward rate is $2.00. The British interest rate is 5 percent, and the U.S. interest rate is 4 percent over the 180-day period.
a. $351,210.
b. $381,210.
c. $371,210.
d. $400,152.

Respuesta :

Kolawole845

Answer:

Dollar cost of Money market hedge= $400,152.38

Explanation:

The money market hedge would be set up as follows:

Step 1: Deposit in Pounds

Deposit an amount in Pounds equals to

Amount to be deposited= Payable/(1+deposit rate)

= 200,000 pound/(1.05)=   190,476.19   pounds

 

Step 2 : Convert the sum

Convert  190,476.19   pounds at the spot rate  of $2.02

Dollar amount =  190,476.19  × 2.02

= $ 384,761.90  

Step 3: Borrow at home (US)

Borrow  $ 384,761.90     for 180 days at an interest rate of 4%

Amount due (inclusive of interest) = Amount borrowed × 1.04

=$  384,761.90   × 1.04

= $  400,152.38  

Dollar cost of Money market hedge= $400,152.38  

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