Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.
A) $391,210.
B) $396,190.
C) $388,210.
D) $384,761.
E) none of the above

Question

Quizplus · Accepted Answer

SOLUTION:
1.Need to invest £190,476 (£200,000/1.05) = £190,476.
2.Need to exchange $384,762 to obtain the £190,476 (£190,476 × $2.02) = $384,762.
3.At the end of 180 days, need $400,152 to repay loan ($384,762 × 1.04) = $400,152.

Use the Following Information to Calculate the Dollar Cost of Using