Question

1. Assume the following information: 180-day U.S. interest rate 180-day British interest rate 180 day forward rate of British pound Spot rate of British pound 8% 9% $1.50 $1.48 Assume that a US firm will receive 400,000 pounds in 180 days. Would it be better off using a forward hedee or a money market hedge? Substantiate your answer with estimated revenues for each tune hedge. h. Assume that a US firm will pay 400,000 pounds in 180 days. Would it be better off using a forward heden a money market hedge? Substantiate your answer with estimated revenues for each type of hedge

Answer 1

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W ' v to a 1x 3 ENG 03:39 29-03-2020 E BW21 BV : X BW V for BX RECEIVABLES BY BZ CA CB cc CD E F 1 CG CH a ce FORWARD HEDGE GUARANTEED DOLLAR PROCEEDS = GUARANTEED DOLLAR PROCEEDS = 400000 POUNDS X 1.50 600000 Nm to 000 MONEY MARKET HEDGE AMOUNT RECEIVABLE = AMOUNT TO BE BORROWED TODAY = AMOUNT TO BE BORROWED TODAY = 400000 POUNDS 400000/1.09 366972.48 POUNDS 11 12 CONVERT IT INTO DOLLAR AT SPOT RATE = 543119.27 [366972.48 X 1.48] 13 14 INVEST THIS AMOUNT AT 8% GUARANTEED DOLLAR PROCEEDS = 15 586568.81 [543119.27 X 1.08] ANSWER FORWARD HEGDE IS BETTER 19 22 23 24 ... | INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean | YIELD bond portfolio WACC RESI DIV POLICY SPECIFIC HEDGE DIV YIELD ETEMADI ... Đ :

W ' v to a 1x 3 ENG 03:51 29-03-2020 BX40 X ✓ fx _ BV BW BX B Y B Z CA CB CC CD CE CF CG CH CI CJA PAYABLES 22 23 FORWARD HEDGE GUARANTEED DOLLAR PAYMENT = GUARANTEED DOLLAR PAYMENT = 400000 POUNDS X 1.50 600000 24 25 26 27 MONEY MARKET HEDGE AMOUNT PAYABLE = AMOUNT TO BE INVESTED TODAY = AMOUNT TO BE INVESTED TODAY = 28 400000 POUNDS 400000/1.09 366972.48 POUNDS 31 CONVERT IT INTO DOLLAR AT SPOT RATE = 543119.27 [366972.48 X 1.48] 32 33 BORROW THIS AMOUNT AT 8% GUARANTEED DOLLAR PAYMENT = 34 586568.81 [543119.27 X 1.08] 35 36 ANSWER MONEY MARKET HEDGE IS BETTER 37 38 42 ... INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bond portfolio WACC RESI DIV POLICY SPECIFIC HEDGE DIV YIELD ETEMADI ... + 1