Question

You (US firm) have accounts receivables (ARs) of SF 1,000,000 in 90 days.

• Given S_t of $0.6500 – $0.6530 / SF
• Swiss interest rate of 6% - 6.4% p.a. (find for 90 days) and
• US interest rate of 8.4% - 8.8% p.a. (find for 90 days).

1. What are your receivables in dollars if you hedge using money market hedging?

2. Instead of ARs, if the firm had accounts payables (APs) in Swiss Francs, what are your payables in dollars if you hedge using money market hedging?

Answer 1

a]	Since the exposure is an asset [receivable] in SF an
	equivalent liability in SF maturing after 90 days should
	be created.
	Hence, amount to be borrowed on day 1 [today] = 1000000/1.016 =	984252	SF
	This amount in SF should be converted to $ at spot to get 984252*0.6500 =	$            6,39,764
	This would be invested in $ to get [after 90 days} 639764*1.041 =	$            6,65,994
	On the 90th day, the SF receivable of 1,000,000 will
	be used to pay off the SF loan which will have a
	maturity value of SF1,000,000.
	The $ deposit will fetch $665,994 after 90 days.
	The value of the receivable in dollars after 90 days =	$            6,65,994
b]	Since the exposure is a liability [payable] in SF an
	equivalent asset in SF maturing after 90 days should
	be created.
	Hence, amount to be deposited on day 1 [today] = 1000000/1.015 =	985222	SF
	This amount required for the SF deposit should be borrowed in equivalent $ at spot, the amount being 985222*0.6530 =	$            6,43,350
	The dollar loan will have a maturity value [after 90 days] of 643350*1.022 =	$            6,57,504
	On the 90th day, the SF deposit having a maturity value of 1,000,000 will be closed and used to pay off the SF liability of 1000000.
	The dollar loan which will have a maturity value [after 90 days] of 657504 will be paid off.
	Amount payable in dollars =	$            6,57,504