Q1 Current spot rate for the Dollar/Euro = $/€ 2.000 +/- 0.003. Dollar quoted at 0.2c premium for forward rate. What will a $2,000 receipt be translated to at the forward rate? Answer: €999.50
Q2 A US co. owes a European co. €3.5m due in 3months. Spot rate $1.96-$2:€1 Annual int rates: US 8% borrowing, 3% Deposit.
Europe 5% borrowing, 1% Deposit
What will be equivalent US $ value of payment using money market hedge? Answer: $7,122,195
Q3 Current spot rate for the $ to the € is $2:€1. Annual int rates are 8% in US and 4% in Europe.
What is the 3 months forward rate likely to be?
Answer: $2.0198:€1
Thank you!
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Struggling with Foreign currency risk pls help
11y ago#1Question1:
The spot rate is 1.997 - 2.003
The forward rate therefore is 1.995 - 2.001
If we convert the receive of $2000 at the forward rate we get 2000/2.001 = 999.50
11y ago#2Question2:
To answer this would mean me typing out the whole lecture on money market hedging. You will have to watch the free lecture on this.
11y ago#3Question 3:
We need to use the interest rate parity formula from the formula sheet.
The US 3 month interest is 8 x 3/12 = 2%
The Europe 3 month interest rate is 4 x 3/12 = 1%
So the forward rate is 2 x 1.02/1.01 = 2.0198
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