Question

Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 6%, and the U.S. interest rate is 4% over the 180-day period. $351,210. $381,210. $371,210. $400,152

Answer 1

$400,152

Step-by-step explanation:

Given :

Amounts payable = 200,000 pounds

Fuds required =
`$(200,000)/(1+0.06 * (180)/(360))$`

= 194,174.76 pounds

Cost of dollars = 194,174.76 x 2.02

= $ 392,233

Therefore, the amount borrowed today in dollars = $ 392,233

The payment of loan after the 180 days =
`$392,233 * \left( 1 + 0.04 * (180)/(360)\right)$`

= $ 400,077.67

= $ 400,152 (rounding off)

The number of days taken in a year = 360