Question

Paul Inc. needs €1,160,000 in 30 days. Delaney can earn 0.05 annualized on a German security. The current spot rate for the euro is $1.00. Delaney can borrow funds in the U.S. at an annualized interest rate of .06. If Delaney uses a money market hedge, how much should it borrow in the U.S.?

Answer 1

Given,

Paul Inc. needs €1,160,000

Spot rate 1€ = $1.0

Annualized Earning rate on German Security = 0.05 P.a.

Annualized Interest rate for borrowing rate in U.S. = 0.06 P.a.

Money market hedge:

Step 1: Invest Present Value of €1,160,000

Paul Inc. needs €1,160,000 in 30 days

Earning rate for 30 days = 0.05*30/365

                                      =.00411

Amount in € to be invested = €1,160,000/1.00411

                                           = €1,155,252

Step 2: Buy the above amount at spot market.

Amount of $ need to convert into € = 1,155,252 * 1

                                                        = $1,155,252

Step 3: Borrow the above amount

Amount need to borrow is $1,155,252