5. Please use the following information to answer the next three questions about

Question

5. Please use the following information to answer the next three questions about money market hedge:
180-day U.S. interest rate 8%
180-day British interest rate 9%
180-day pound forward rate $1.50
U.K. pound spot rate   $1.48
Riverside Co. will receive 400,000 pounds in 180 days.

How much foreign currency do you need today in a money market hedge?

How many U.S. dollars do you receive from the currency conversion today?

If the U.S. dollars received from the conversion are immediately deposit in U.S. for 180 days, how much will be available to Riverside Co. after 180 days?

Explanation / Answer

1) Foreign currency needed today in a MMH: As the firm has a future FC asset of GBP400000, it has to set up a FC liability which will have an equivalent value in 180 days. Amount needed in FC = GBP of 400000/1.09 = £   3,66,972.48 2) Amount of US$ received from the currency conversion = 366972.48/1.48 = $   2,47,954.38 3) Amount available to Riverside Co after 180 days = 247954.38*1.08 = $   2,67,790.73 Note: The rates of interest have been taken as for 180 days; not per annum. If it is per annum the rates would be 4% and 4.5% for 180 days.

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