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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › MCQ on Money Market Hedge
A US company owes a European company EUR3.5 million due to be paid in 3 months’ time. The spot exchange rate is $1.96 – $2 : 1 currently. Annual interest rates in the 2 locations are as follows:
US Borrow – 8% deposit 3%
Europe Borrow – 5% deposit 1%.
What will be the equivalent US $ value of the payment using a money market hedge?
A = 6.965,432
B= 6,979,750
C= 7,485,149
D= 7,122,195
The answer is D and is calculated as follows:
Amount to be deposited today = 3.5 million EUR x 1(1+(.01/4))=3419272
The cost 3491272 x 2 = 6982544 today.
Assuming this to be borrowed in US$ the liability in 3 months will be 6,982,544 x (1+(.08/4))=7,122,195.
Are they simple dividing the .01 and .08 by 4 to get the interest rate spread?
Yes.
If the interest rate is 1% per annum, then for 3 months it is 3/12 x 1%
(You will find the free lectures on money market hedging useful)