A US firm plans to use a money market hedge to hedge its payment of five...
- A US firm plans to use a money market hedge to hedge its payment of five million British pounds for British goods in one year. The US interest rate is 5% and the British interest rate is 7%. The spot rate of the British pound is $1.65 and the one-year forward rate is $1.60.
- How many British pounds does the firm need to invest today?
- How many US dollars does the firm need to borrow today?
Homework Answers
US interest rate = 5%
British interest rate =7%
spot rate of the British pound = $1.65
one-year forward rate = $1.60
Payment of five million British pounds for British goods in one year
a)
British pounds to be Invest today: 5,000,000/1.07 = 4,672,897.2
b)
Amount to be borrowed in $ today: 4,672,897.2 * $1.65 = $7,276,785.72
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