Question

I am a US chocolate importer who is importing Belgian chocolate from Belgium worth € 1 million and the amount is due in 360 days. I want to hedge my Belgian euro payables using a money market hedge and obtain the following quotes from my banker: Spot rate is: $1.1000 – $ 1.1100 / € The Belgium interest rates are: 3.0 % - 3.4 % annually and US interest rates are: 2.1 % – 2.5 % annually. Using a money market hedge and bid-ask spreads, what are my $ payables in 360 days?

Answer 1

Dollar payable in 360 days as per MMH = $     1,104,611.650

	Money Market Hedge :
	Exposure   =                EUR	1,000,000.00
	Have to pay with in a year
1	Creat an asset(Investment) and settle the Payables using maturity value of investment
	Hence Invest present value of payables =	1000000/1.03
	EUR	970,873.7864
	Investing rate in Belgium	3.00%
2	Covert the Present value of payables in EUR to USD using spot rate
	Spot rate = Ask rate   USD 1.1100 / EUR	1.1100
	Amount in USD	970873.7864*1.110
		$   1,077,669.9029
3	Borrow USD for one YEAR
	USD interest rate ( Borrowng rate)	2.5%
4	Amount to be paid at the maturity	1077669.9029*1.025
		$     1,104,611.650