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Park Co is based in a country whose currency is the dollar ($). The company regularly imports goods denominated in euro (€) and regularly sells goods denominated in dinars. Two of the future transactions of the company are as follows:
Three months: Paying €650,000 for imported goods
Six months: Receiving 12 million dinars for exported capital goods
Park Co has the following exchange rates and interest rates available to it:Bid Offer
Spot exchange rate (dinars per $1): 57·31 57·52
Six-month forward rate (dinars per $1): 58·41 58·64
Spot exchange rate (€ per $1): 1·544 1·552
Three-month forward rate (€ per $1): 1·532 1·540
Six-month interest rates:Borrow Deposit
Dinars 4.00% 2.00%
Dollars 2.00% 0.50%
The finance director of Park Co believes that the upward-sloping yield curve reported in the financial media means that the general level of interest rates will increase in the future, and therefore expects the reported six-month interest rates to increase.What is the future dollar value of the dinar receipt using a money market hedge?
The book gives this answer: Dollar value = (12m x 1.005)/(1.04 x 57.52) = $201,602
But i dont understand why
Where is this question from?
I would like to have a look at it, so I can try and help you with it.I think it is:
Calculate the amount of dollars needed to purchase the dinars at the spot exchange rate:
Dollar amount = 12,000,000 dinars / 57.52 dinars per $1 = $208,623.29Adjust the dollar amount for the interest rates:
Multiply the dollar amount by (1 + deposit rate) / (1 + borrowing)
Adjusted dollar amount = $208,623.29 * (1 + 0.5%) / (1 + 4%) = $201,602.40Therefore, the future dollar value of the dinar receipt using a money market hedge is approximately $201,602.
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