BXP Inc., a UK importing firm anticipates an outflow of 186 million Danish Krone (DKK) in...

BXP Inc., a UK importing firm anticipates an outflow of 186 million Danish Krone (DKK) in 6 months. BXP’s managers are worried about the course of the DKK/£ exchange rate over the next 6 months and they decide to hedge. The current spot and forward rates are S0=6.1718 DKK/£ and Ft=6 months=6.2035 DKK/£. BXP can borrow/lend at a £-interest rate of 3.57% and a DKK-interest rate of 5.15%.
a) How can BXP hedge its position using the forward market? Calculate the 6-month ahead cash flow BXP can lock in with the forward hedge.
b) How can BXP hedge its position using the money markets? Calculate the 6-month ahead cash flow BXP can lock in with the money market hedge.
c) Why do the two hedges result in different amounts that can be “locked in”? Which of the two hedges is best for BXP Inc.? Would things be different if BXP was attempting to hedge an inflow of DKK?

Expert Solution

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b) Money Marke +_hedge using Money Market bedge to lock in 6-month abead cash flow Deposit required amount at DKK - Interest rate of 5.15 / which for 6 months, which matures after 6 months and the matured amount is exactly the amount of payables exposure Therefore, required amount to be deposited . Payables exposure (ltr) where r= DKK - Interest rate of 5.15%. 186 million CIT0-02575) = 186 million 1.02575 181,330,733.609 DKK 80, required amount to be borrowed fo. fofpounds) to deposit above amount at Spot rate (So) = 6:1718 DKKLE = 181,330,733. 609 6.1718.

jeff jeffy answered 1 year ago

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