Question

Canada Export Inc. (CEI) is a Canadian MNC that needs to pay €240,000 in one year...

Canada Export Inc. (CEI) is a Canadian MNC that needs to pay €240,000 in one year to a German supplier. The current spot rate is CAD$ 1.50 per €. The interest rate in Canada is 3 percent and the interest rate in Germany is 4 percent. CEI decides to use a money market hedge to mitigate all of exchange rate risk. What is the €240,000 payables worth in CAD$?

A.

CAD$ 158,462.
B.

CAD$ 161,553.
C.

CAD$ 356,538.
D.

CAD$ 363,495.
E.

CAD$ 360,000.
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Answer #1

The payment is hedged as follows :

  • An amount equal to the present value of the € payable amount, discounted at the € interest rate, is required to be deposited today. € to deposit today =  €240,000 / (1 + 4%) =  €230,769.23
  • An amount equal to the $ equivalent of €230,769.23 is borrowed today. The exchange rate applied here will be the spot exchange rate. $ borrowed today =  €230,769.23 * 1.50 = $346,153.85
  • $ to repay after 1 year =  $346,153.85 * (1 + 3%) = $356,538.46
  • $ payable amount (rounded off) =  $356,538

The answer is C

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