Question

GM us using a money-market hedge to protect an LM 200 million payable due in one year. The U.S interest rate is 9% and the lira interest rate is 14%. The spot rate moved from LM 1293/$1 at the start of the year to LM 1349/$1 at the end of the year. GM's hedged cost of payment is ___

Answer 1

Since the liability is created in LM(payment ),you will Create asset there for one year by making deposit for one year of LM =200,000,000/ (1+.14 )

        = 200,000,000 /1.14

           = LM 175,438,596.491 Today

In order to deposit 175,438,596.491 today in LM ,you will have to borrow   $ 175,438,596.491 / 1293 =$ 135,683.3693 in US at 9%

Payment of borrowed amount at due date = 135,683.3693 (1+.09 ) = $ 147,894.8725

GM's hedged cost of payment =$ 147,894.8725