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?

	a.	$1,096,044.49
	b.	$1,104,611.65
	c.	$1,077,669.90
	d.	$1,094,660.20

Answer 1

Answer is  $     1,104,611.650 (OPtion B)

	Money Market Hedge :				115.75
	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