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You have a €350,000 receivable. The spot rate is $1.0853/€. The European borrowing interest rate is...

You have a €350,000 receivable. The spot rate is $1.0853/€. The European borrowing interest rate is 2.1% and the U.S. borrowing rate is 2.2%. The European deposit interest rate 2 is 0.8% and the U.S. deposit interest rate is 0.5%. Calculate the dollar amount of a money market hedge.

Solutions

Expert Solution

Money Market Hedge :
Exposure = €         350,000.00
Due in 3 months
Creat a liability and settle the liability using receivable
Hence borrow EUR = 350000/1.021
€         342,801.18
Borrowing rate 2.10%
Convert the EUR to USD using spot rate
Spot rate = USD 1.0853 / EUR $                 1.0853
Amount in USD 342801.18*1.0853
$         372,042.12
Invest USD for the period:
US Rate deposit rte 0.5%
Amount realised after investment= 372042.12*1.005
$         373,902.33
Dollar amount of a money market hedge =
$         373,902.33

jeff jeffy answered 3 years ago
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