Use the following to answer questions 14 - 16: PQR Associates will owe EUR 100,0

Question

Use the following to answer questions 14 - 16: PQR Associates will owe EUR 100,000 in one year. It is concerned about appreciation of the EUR and is considering possible hedging techniques. The following market and exchange conditions apply: One Year Forward Rate EUR Interest Rate US Interest Rate USD 1.20 5% 8% Call Option Exercise Price Call Option Premium Today’s Spot Rate USD 1.20 USD .03 USD 1.18 PQR has forecasted exchange rates and has developed the following probability distribution for the expected 1 year exchange rate: 1 Year Exchange Rate USD 1.16 USD 1.22 USD 1.24 Probability 20% 70% 10%

If PQR hedges with a Money Market Hedge, what is the cost of their payables in 1 year?

Explanation / Answer

Here the foreign currency payment has to be made after a defined period of time (one year), therefore the following steps have to be taken to hedge currency risk via the money market:

Accordingly,

Therefore the cost of payables in 1 year is USD 121,371

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.