Question

In: Accounting

Calculate the lowest USD cost to pay 100,000UKP of payables in 180 days. Assume the firm...

Calculate the lowest USD cost to pay 100,000UKP of payables in 180 days. Assume the firm has no excess cash. The current spot rate of the UKP is USD 2.01per UKP, and the 180 day forward rate is USD 2.00 per UKP. The USD interest rate is 5% for borrowing, and the UKP interest rate is 4% for deposits. Both of these rate are for 180 days.

What is the lowest USD cost to pay the UKP payable?

Expert Solution

one can hedge future postion against currency exchange change risk either by forward hedge or by money market hedge:

data given in the question are.....

100,000UKP of payables in 180 days

Spot rate - 1 UKP : 2.01 USD

forward rate - 1 UKP : 2.00 USD

180 days UKP interest rate - 4%

180 days USD interest rate - 5%

Amt payable under forward Hedge = 100,000UKP x 2.00 USD (forward rate)

= 100,000 x 2

= 2,00,000

Amt payable under Money Market Hedge

Pv of 100,000 UKP payables afet 180 days = 100,000/ (1.04)

= 96,153.85

That means that current value to repay 100,000 UKP after 180 days in USD is 193,269.23 (96,153.85 x 2.01(spot rate) .
Value of current 193,269.23 USD after 180 days is 202932.69 (193,269.23 x 1.05).

What is the lowest USD cost to pay the UKP payable?

Lower of following -USD value of 100,000 UKP payable after 180 days

under money market hedge is 202932.69 USD
under Forward Hedge is 2,00,000 USD.

Answer is 2,00,000 USD.

ekkarill92 answered 2 years ago

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