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Money market

This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.

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June 9, 2022 at 9:15 am #658069
Shi2004
Participant
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The debt finance will be provided by an immediate €6.5 million loan notes issue. The interest rate on the loan issue is 8% per year with annual interest being payable in 2 installments in euros on a 6monthly basis of €260000. What should Gn do in dollar now to correctly set up a money market hedge on payment of interest expected in 6month time.
The spot rate is €1.3050-€1.3112
Why do we use 1.3050 as spot rate and not the other rate???
June 9, 2022 at 3:47 pm #658123
John Moffat
Keymaster
- Topics: 57
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You have not typed up the full question.
I assume that that company in question is in the US?
Also is the spot rate quoted as $/€ or as €/$?
If it is a past exam question or a question in the BPP Revision Kit, then tell me which question.
June 9, 2022 at 4:24 pm #658149
Shi2004
Participant
- Topics: 79
- Replies: 33
Sir its actually in the pre mock june 22. The home currency is $. The spot rate is Euro to $1. The spot exchange rate €1.3050-€1.3112
June 9, 2022 at 4:43 pm #658159
John Moffat
Keymaster
- Topics: 57
- Replies: 54469
To pay the interest they need to buy €’s. Given that the exchange rate is quoted as €/$ then buying €’s means that we use the lower rate. (Using the higher rate would result in a lower payment which cannot ever be the case as I explain in my lectures.)
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