In the answer to this exercise we get:
Borrow£595,373at5.5%perannumforfivemonths,
I'm not sure how they arrived at 595,373 with the exchange rates available.
Please can you help?
Many thanks,
Ask the Tutor ACCA AFM
Lammer PLC (June 06) Money market hedge
4y ago#1They need to pay $1,150,000 in 5 months time.
The $ interest is 2% per annum and so for 5 months it will be 5/12 x 2% = 0.83333% interest.
So the $'s to deposit now in order to have $1,150,000 in 5 months time are 1,150,000/1.0083333 = $1,140,496.
The will buy that many $'s now at the spot exchange rate of 1.9156, which means that the £'s they need to borrow now are 1,140,496 / 1.9156 = £595,373
Do watch my free lectures on foreign exchange risk management where I explain money market hedging in detail.
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