Question

) A U.S. firm imports €10 million of goods from a German firm, and needs to pay the full amount to the firm in 6 months. This U.S firm is engaging in the money market hedge in order to eliminate the transaction exposure. The following rates are available to the US firm: 6 month US interest rates = 3%, 6 month German interest rates = 5%, and the spot exchange rate (S^$/€) = $1.20/€.

a. Describe the money market hedging strategy for the US firm. Be specific.

b. Now, suppose that the six month forward rate is available to the US firm at the rate of $1.20/€. Describe the forward hedging strategy to cover the €10 million payables. Be specific.

c. Which hedging strategies (money market hedge or forward hedge) would be better (less expensive) to employ? Explain why.

Answer 1

US firm German fimm है। 10mm Payable= 6 months spot mate - 1 € = 1.208 31, us interest Germany. let German interest Pewcecture! Bororow from us l invest in ante to le invested in Germany + & (5.) () = € 10m n be the Thes ma x= х 37. x 6 1.20 € 9.756 Now convert it in us al snor barecon from the us In $ = 9.756 41.20) + (9.756) 1$ 11.88 million 1 € = 1.20 (6) Forward reak able under forwand had (c) Payable under Payable hedge € 10mer x 1.208 $12 million mmo = $11.88mn under found - $12 min mmo, , (mon is better Market Hadge) , (money Man C. less payable]