Question

The 360-day borrowing and deposit rate in the U.S. is 7.25% and 3.69%, respectively. The 360-day borrowing and deposit rate in Jordan is 5.46% and 3.19%, respectively. Pablo Corp. will need 147,295 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.46. What is Pablo's cost from implementing a money market hedge (please round to a dollar)?

Answer 1

1	Pablo corp need 147295 Dinar in 360 days
2	therefore pablo has to invest present value 147295 today @ 3.19% in Jordan , so can he can withdraw the amount of 147295 at end of 360 days		147295/1.0319
			142,741.54	(Jordan dinar)
3	To invest that amount pablo has to borrow equivalent amount of dollar in the US
	Amount of $ has to be borrowed =	142741.54 / $ 1.46
	( It has to be converted using spot rate)		97,768.18	(USD)
	Amount has to be borrowed in USD =		97,768.18
	Interest for the same =		97768.18 *7.25%
			$ 7088.19305
	Pablo's cost from impimenting Money market hedging is =		$ 7088.19305