Question

Kogan, an Australian online retailer, has an liability of 1,500,000 EUR payable in one year to...

Kogan, an Australian online retailer, has an liability of 1,500,000 EUR payable in one year to a bank in Germany. The current spot rate is 2.1205 AUD/EUR and the one year forward rate is 2.1185 AUD/EUR. The annual interest rate is 4% in Germany and 3.5% in Australia. The company can also use options on EUR at the strike price of 2.1200 AUD/EUR for a premium of 0.05 AUD/EUR. Suppose the future exchange rate is 2.1225 AUD/EUR. The AUD outcome of using the money market hedge for this transaction is

Select one:

a.  $3,165,457.93

b. none of the options

c. $3,058,413.46

d.  $3,177,750.00

e.  $3,180,750.00

Homework Answers

Answer #1
Money Market hedge
Liability in EUR       1,500,000
So the equivalent amount is deposited today in Germany bank so that the amount after
1 year becomes 1,500,000. The amount required to deposit today will be taken on loan
in Australia.
Deposit amount= 1500000/(1+4%)
Deposit amount= 1,442,307.69
This gets converted back to AUD at the current spot rate
Equivalent AUD 1442307.69*2.1205
Equivelent AUD 3,058,413.46
The amount payable in Australia after 1 year on this loan 3058413.46*(1+3.5%)
The amount payable in Australia after 1 year on this loan 3,165,457.93
So cash outgo after 1 year in AUD will be 3,165,457.93. Hence, option A is the right answer.
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