Question text
Conroe Ltd expects to receive EUR 1 million in 6 months’ time. The following product rates are available:
If a money market hedge is used, what NZD amount is received in 6-months?
Select one:
a. 1,905,789
b. 1,752,646
c. 1,799,441
d. 1,956,674
After 6 months of time, we are getting 1 milion EUR. There is a high degree of association of Foreign exchange risk.In order to eliminate this risk, one can use money Heding techinque
Step: Borrow present value of 1 million EUR today to pay it in the Future
Interest in EUR = 12%p.a or 6% for half years
Present value of 1 million EUR= 10,00000EUR/1.06
= 943396.22 EUR
So Borrow 943396.22 EUR today at an interest rate of 12% p.a
Loan balance after 6 months is= 943396.22*1.06=10,00000 EUR
So, we can borrow 943396 EUR and pay off 1 million EUR after 6 months.However , we are having receivable of 1 million EUR, to be received in 6 months of time, we can easily pay off the loan.
Now we are getting 943396.22 EUR, convert into NZD on spot rate
1 NZD = 0.5400 EUR
1 NZD/0.5400 EUR = 1 EUR
1 EUR = 1.85185 NZD
943396.22 EUR = 943396.22*1.85185 NZD
= 1747028.29 NZD
If we invest 1747028.29 NZD at an interest rate of 6% p.a or 3% for 6 months
Amount realized in NZD after 6 months = 1747028.29*1.03
= 1799440 NZD
So option C ) 1799441 NZD is the correct answer.
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