Compaq Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Compaq protect this receivable using a money market hedge?
A) borrow £1 million pounds today
B) lend £1 million pounds today
C) borrow £869,565 pounds today
D) lend £986,754 pounds today

Question

Quizplus · Accepted Answer

To protect the receivable, Compaq needs to enter into a money market hedge. This involves borrowing or lending an amount in the present to offset the future receivable. To determine the amount to borrow or lend, we need to calculate the present value of the receivable using the interest rate.

Present value of receivable = £1 million / (1 + 0.15) = £869,565

Therefore, Compaq should borrow £869,565 today to offset the receivable. Option C is the correct choice.

Compaq Computer Has a £1 Million Receivable That It Expects