Evaluation of money-market hedge, Financial Management

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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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