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A European company is importing (purchasing) $600,000 of goods in one year. The current spot price...

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Finance

A European company is importing (purchasing) $600,000 of goodsin one year. The current spot price is $1.23/€. Risk free rates inthe US and Eurozone are 4% and 3%, respectively. The forward rateis $1.20/€. Your CEO wants to implement a money market hedge. Thisinvolves borrowing in one currency to purchase the other currency(which you will then invest for one year). What is the amount youare borrowing? Once the money market hedge is finalized a yearlater, was this hedge more favorable than a forward hedge?

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3.6 Ratings (331 Votes)
US Interest Rate 4 and Euro Interest Rate 3 Payable 600000 and Tenure 1year Current Spot Rate 123 A moneymarket hedge can be implemented as described below Borrow the    See Answer
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A European company is importing (purchasing) $600,000 of goodsin one year. The current spot price is $1.23/€. Risk free rates inthe US and Eurozone are 4% and 3%, respectively. The forward rateis $1.20/€. Your CEO wants to implement a money market hedge. Thisinvolves borrowing in one currency to purchase the other currency(which you will then invest for one year). What is the amount youare borrowing? Once the money market hedge is finalized a yearlater, was this hedge more favorable than a forward hedge?

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