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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,
They 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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