Dell Computer has a £1 million receivable that it expects to collect in one year.Suppose the interest rate on pounds is 15%.How could Dell 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 from fluctuations in the exchange rate, Dell can use a money market hedge. In this case, Dell will borrow £869,565 pounds today at the current interest rate of 15% for one year. After one year, Dell will receive £1 million from the receivable, which will be used to repay the loan with interest. This will ensure that Dell locks in the exchange rate and protects the value of the receivable.

Dell Computer Has a £1 Million Receivable That It Expects