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XYZ CO is operating in UK exports $ 300,000 goods to a USA based co. What is the expected amount if receipts £ after 3 months time if money market hedge is taken.
Borrowing Rate
$ 5%
£ 8%Lending Rate
$ 4%
£ 7%This is impossible to answer, without knowing the current spot rate.
(The free lectures on money market hedging will help you. But remember that since the borrowing and depositing are for 3 months, the relevant interest rates are 3/12 time the annual rates given)
Borrow $’s for 3 months: 300,000 / (1 + (3/12 x 0.05)) = $296,296
Convert at spot: 296296 / 1.61 = GBP 184,035
Deposit GBP for 3 months, so the GBP receipt in 3 months time is:
184035 (1 + (3/12 x 7%)) = GBP 187,256
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