Question

US chocolate importer who is importing Belgian chocolate from Belgium worth € 1 million and the amount is due in 360 days. I want to hedge my Belgian euro payables using a money market hedge and obtain the following quotes from my banker:

Spot rate is: $1.1000 – $ 1.1100 / €

The Belgium interest rates are: 3.0 % - 3.4 % annually and

US interest rates are: 2.1 % – 2.5 % annually.

Using a money market hedge and bid-ask spreads, what are my $ payables in 360 days?

Answer 1

Solution :-

With Money Market Hedge , $ payables in 360 days =

Step 1 :- Interest Receiving rate in Belgium = 3.0%

Now we need to make Payment Euro 1 million after one year

So we need to deposit Euro 1,000,000 / ( 1 + 0.03 ) = Euro 970,873.79

Step 2 :- To deposit Euro 970,873.79 today we need to have $ =  970,873.79 * 1.11 = $1,077,669.90

Step 3 :- Now to have $1,077,669.90 we need to take $ on loan

Interest Rate on Loan = 2.5%

So  $ payables in 360 days = $1,077,669.90 * ( 1 + 0.025 ) = $1,104,611.65

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