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Hi John
I am hoping you can help me with this one.
A company whose home CCY is the Euro expects to receive $800k in 3 months time from a customer. The following rates apply:
Borrow Home 6%
Deposit Home 4%
Borrow Foreign 10%
Deposit Foreign 8%Current spot is $1.50/€1.00
What is the 3 month value of Euro receipts using a MM hedge.
My workings are all over the place and clearly wrong. I have watched the lectures and if paying or receiving it catches me out. Have you any advice or rule for determining how to treat these type of questions?I will also watch the lecture again.
They will be receiving $’s and so to be able to convert into euros now, they need to borrow $’s
They borrow $’s at 10 x 3/12 = 2.5% for 3 months, so the $’s they will borrow = $800,000 / 1.025 = 780,488
Converting at spot gives 780,488 / 1.50 = 520,325 euros
They will deposit at 4 x 3/12 = 1%, and so they end up with 520,325 x 1.01 = 525,528 euros in 3 months time.If they are receiving the foreign currency then they will borrow that currency. If they are paying the foreign currency then they will deposit that currency.
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