- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Herd Co is based in a country whose currency is dollar. The comoany expects to receive 1500000 euros in 6 months from Find Co a foreign customer. The finance director of Herd co is concerned that the euro may depreciate against dollar before the foreign customer makes payment and she is looking at hedging the receipt.
Herd co has in issue loan notes with a total nominal value of $4 million which can be redeemed in 10 years time . The interest paid on loan notes is at variable rate linked to LIBOR. The finance director of Herd co believes that interest rates may imcrease in the near future
The spot exchange rate is 1.543 euros per $1. The domestic short term interest rate is 2% per annum while foreign short term interest rate is 5% per year
Which of the following hedging methods will not be suitable for hedging the euro receipt
a)Forward exchange rates
b)Money market hedge
c)Currency future
d) Currency swapSir correct answer is Currency swap but please can you explain me
What exactly would you want to swap? The purpose of swapping is to end up paying interest on a different currency than your home currency, which is of no relevant with regard to the euro receipt. Additionally, it should be clear from my lectures that the first three are all standard ways of hedging the risk of a receipt in a foreign currency.
- The topic ‘Herd co MTQ’ is closed to new replies.