PLEASE SHOW WORK Suppose AAPL has a 2 billion USD worth of profit it is expecting...

PLEASE SHOW WORK

Suppose AAPL has a 2 billion USD worth of profit it is expecting to collect from its subsidiary in Hong Kong in 12 months. How can AAPL hedges with a money market hedge if the current exchange rate is at $0.1255 per HKD and the interest rate in Hong Kong is 2% and the interest rate in the US is 3%? How much USD will AAPL actually get from this hedge?

PLEASE SHOW WORK

Solutions

Expert Solution

=> Apple Inc is expecting 2 billion dollars from its hong kong subsidiary in 12 months(1 year), In order to hedge we have to first calculate the value of 2 billion dollars in HKD. [1 dollar = (1/0.1255) HKD, because according to the current exchange rate 1 HKD = $ 0.1255]

*2,000,000,000* (1/0.1255) = 15,936,254,980.08 HKD

=> Now we know the future value of HKD, Apple inc going to get in 1 year.Now we have to calculate the present value of HKD by using the formula, Present value = Future vaue / (1+r)^t , r is the interest rate and t is the time period.In this case the interest rate is 2% and time period is 1 year.

* 15,936,254,980.08/1.02 = 15,623,779,392.24 HKD

=> Convert that amount into US dollars at the current exchange rate

15,623,779,392.24*0.1255 = $ 1,960,784,313.73

=> Therefore, Apple Inc have to invest an amount of $ 1,960,784,313.73 at 3% interest in bank to money market hedge

*1,960,784,313.73*1.03 = $ 2,019,607,843.14

=> Apple inc will get $ 2,019,607,843.14 from this hedge

jeff jeffy answered 1 year ago

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