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April 21, 2021 at 1:49 pm #618384John1998m
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Sir, there is a question Boluje Co (Dec 2008) in which requirement c(ii) asked for money market hedge BUT I do have a problem with this question that why do we have to account for interest payment of 976,000 pesos rather than 16m pesos because the foreign bond issue raised 16m pesos?
Confused to see the answer that the examiner has calculated money market hedge on interest payment in one year’s time of 976,000 pesos BUT not on the total foreign bond issue raised 16m pesos?
Please guide me here! I have put the question below for you to see that!
Three years ago Boluje Co built a factory in its home country costing $3.2 million. To finance the construction of the factory, Boluje Co issued peso-denominated bonds in a foreign country whose currency is the peso. Interest rates at the time in the foreign country were historically low. The foreign bond issue raised 16 million pesos and the exchange rate at the time was 5.00 pesos = $1.
Each foreign bond has a par value of 500 pesos and pays interest in pesos at the end of each year of 6.1%. The bonds will be redeemed in five years’ time at par. The current cost of debt of peso-denominated bonds of similar risk is 7%. In addition to domestic sales, Boluje Co exports goods to the foreign country and receives payment for export sales in pesos. Approximately 40% of production is exported to the foreign country.
The spot exchange rate is 6.00 pesos = $1 and the 12-month forward exchange rate is 6.07 pesos per $1. Boluje Co can borrow money on a short-term basis at 4% per year in its home currency and it can deposit money at 5% per year in the foreign country where the foreign bonds were issued. Taxation may be ignored in all calculation parts of this question.April 21, 2021 at 2:51 pm #618406John MoffatKeymaster
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In future there is no need for you to type out the whole question, because I have all past questions and answers. You just need to tell me the date of the exam and the name of the question 🙂
The question asks you to illustrate a money market hedge in relation to the cost of the interest payment to be made in one year’s time.
The interest payment in 1 years time is 6.1% x 16M = 976,000 pesos.
(The 16M will not be repaid until after 5 years but the question does not ask about the hedging to the repayment or of the other interest payments that there will be.)
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