1.Assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information below, determine how much the company will receive in dollars if they decide to use a money market hedge. TO GET FULL CREDIT, CLEARLY SHOW ALL OUR WORK.
U.S. rate for 1 year |
= |
11% |
Swiss rate for 1 year |
= |
10% |
Swiss franc spot rate |
= |
$.39 |
Money Market Hedge:
Swiss Francs are RECEIVABLE. Therefore, we need to create a liability in Swiss Francs.
Borrow Swiss Francs and Invest in $.
STEPS:
Now,
(1) Borrow Swiss Francs for 1 year so that, Swiss Francs payable after 1 year along with interest will be SF 600000. Therefore, Borrow 600000/[1+0.1] = SF 545454.54
(2) Convert SF into $ at Spot Rate and Receive 545454.54*0.39 = $212727.27
(3) Invest $212727.27 for 1 year.
After 1 year,
(4) Receive SF 600000
(5) Repay the borrowings along with interest. 545454.54+10% = SF 600000
(6) Realize the Investments along with interest. 212727.27+11% = $236127.27
Amount Receivable = $236127.27
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