he following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
he following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1. The following Information should be used for Questions 1 and 2.
The treasurer of X wants to hedge an exposure to currency risk. X is a
company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time.
The following market rates are available:
Exchange rates: $ per €1
Spot= 1.604 ± 0.002
6 months forward= 1.570 ± 0.004
6 month interest rates:
Euro Borrowing= 4.8%. Euro Deposits= 4.4%
US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%.
What would be the euro cost to X if he hedges through a forward contract?
(a) Euro 326, 495
(b) Euro 319, 285
(c) Euro 313, 525
(d) Euro 333, 295
2. What would be the cost to X if he hedges through the money market ?
(a) USD 634, 631
(b) USD 631, 634
(c) Euro 316, 634
(d) Euro 316, 436
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