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Evaluation of money-market hedge
Expected receipt after 3 months = $300000
Dollar interest rate over three months = 5.4/ 4 = 1.35%
Dollars to borrow now to have $300000 liability after 3 months = 300,000/ 1.0135 = $296004
Spot rate for selling dollars = 1.7820 + 0.0002 = $1.7822 per £
Sterling deposit from borrowed dollars at spot = 296004/ 1.7822 = $166089
Sterling interest rate over three months = 4.6/ 4 = 1.15%
Value in 3 months of sterling deposit = 166089 × 1.0115 = $167999
The forward market is slightly preferable to the money market hedge for the dollar receipt expected after 3 months.
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