home / study / questions and answers / business / finance / money market hedge v
ID: 2773243 • Letter: H
Question
home / study / questions and answers / business / finance / money market hedge vs future hedge suppose you ...
Your question has been answered! Rate it below.
Let us know if you got a helpful answer.
Question
Money Market Hedge vs Future Hedge
Suppose you are an entrepeneur in Korea and have an investment oportunity like the following:
A) Cashflows: make an investment of $10 mil next yeaer and earn profits of $8 mil and 5 mil in 2 and 3 years, respetively
B) Interest rates: 1% in USD and 4% in KRW
Spot and Forward Exchange Rate Qutoes:
Compute NPV of net cashflows with forward hedge?
Spot t=1 t=2 t=3 ask 1,185.50 1,220.75 1,257.10 1,294.60 bid 1,185.30 1,220.40 1,256.50 1,293.80Explanation / Answer
Doller Exchange KRW with Net KRW Pv factor Present Year Cashflow Rate hedging Cashflow at 4% Value 1 $ (10.00) 1220.75 $ 1,257.01 -12570.1 0.9615385 -12086.6 2 $ 8.00 1257.1 $ 1,294.44 10355.517 0.9245562 9574.257 3 $ 5.00 1294.6 $ 1,333.05 6665.2673 0.8889964 5925.398 Total 4450.6842 3413.021 Hedging calculation: Year 1 US$(1 x 1.01) = KRW(1220.75 x 1.04) Therefore US$1 = KRW 1220.75 x 1.04/1.01 =1257.01 Answer: Present Value KRW 3413.021 million
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.