Question

Use these data for the following 2 questions (Total Mark: 2). Wesfarmers, headquartered in Perth, Western Australia, would like to hedge its $50 million payable to the U.S. supplier, which is due in 180 days. Suppose it faces the following exchange and interest rates. Spot rate: AUDO.6780-95/USD Forward rate: AUDO.6800-50/USD U.S. dollar 180-day interest rate (annualized): 4.80%-4.76% Australian dollar 180-day interest rate (annualized): 5.60%-5.40% Question A. What would be the hedged cost of the payable using the forward market? AUD Question B. What would be the hedged cost of the payable using the money market hedge? AUD

Answer 1

Question A:
Cost of payable = 50000000*0.6850 =	34250000	AUD
Question B:
In the MMH, a dollar deposit having a maturity of
$50 million in 180 days is to be made.
The required deposit is 50000000/1.0238 =	$      4,88,37,664
For this the required amount should be borrowed in
AUD for 180 days.
The required amount is 48837664*0.6780 =	33111936	AUD
The maturity value of the borrowings = The hedged cost of the payable = 33111936*1.028 =	34039070	AUD