Question

The outcome of a money market hedge for C$200,000 6-month accounts receivable is when the spot rate is $0.9925 and the U.S and C$ interest rates are 3.00% and 3.5% respectively:

                a.             $195.085.99                                         b.             $198,012.28

                c.             $201,477.50                                         d              none of the above

  

Answer 1

To calculate the outcome of a money market hedge for C$200,000 6-month accounts receivable; we have to calculate the present value (PV) of C$200,000 as it will be received after 6-months (it is needed to lock the current spot rate)

C$ interest rate = 3.5% per year or 6-monthly interest rate for C$ = 3.5%/2 = 1.75%; therefore

Present value (PV) = C$200,000 / (1+1.75%)

= C$196.560.1966

The spot rate is $0.9925/ C$; therefore value in U.S. $

= C$196.560.1966 *$0.9925/ C$

= $195,085.9951

Now invest this amount at the U.S interest rate of 3.00%/year for 6-months to calculate the outcome of a money market hedge, therefore

The outcome of a money market hedge = $195,085.9951 *(1+3.00%/2)

= $195,085.9951 *(1+1.50%)

=$198,012.28

The outcome of a money market hedge is $198,012.28

Therefore the correct answer is option b. $198,012.28