- December 3, 2015 at 8:52 pm #287359gonkoMember
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- Replies: 57
I am hoping you can help me with this one.
A company whose home CCY is the Euro expects to receive $800k in 3 months time from a customer. The following rates apply:
Borrow Home 6%
Deposit Home 4%
Borrow Foreign 10%
Deposit Foreign 8%
Current spot is $1.50/€1.00
What is the 3 month value of Euro receipts using a MM hedge.
My workings are all over the place and clearly wrong. I have watched the lectures and if paying or receiving it catches me out. Have you any advice or rule for determining how to treat these type of questions?
I will also watch the lecture again.December 4, 2015 at 8:04 am #287421John MoffatKeymaster
- Topics: 56
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They will be receiving $’s and so to be able to convert into euros now, they need to borrow $’s
They borrow $’s at 10 x 3/12 = 2.5% for 3 months, so the $’s they will borrow = $800,000 / 1.025 = 780,488
Converting at spot gives 780,488 / 1.50 = 520,325 euros
They will deposit at 4 x 3/12 = 1%, and so they end up with 520,325 x 1.01 = 525,528 euros in 3 months time.
If they are receiving the foreign currency then they will borrow that currency. If they are paying the foreign currency then they will deposit that currency.
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