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Unformatted text preview: IA-4 SolutionsChapter 1111. Forward versus Money Market Hedge on Payables. Assume the following information:90-day U.S. interest rate = 4%90-day Malaysian interest rate = 3%90-day forward rate of Malaysian ringgit = $.400Spot rate of Malaysian ringgit = $.404Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.ANSWER: If the firm uses the forward hedge, it will pay out 300,000($.400) = $120,000 in 90 days.If the firm uses a money market hedge, it will invest (300,000/1.03) = 291,262 ringgit now in a Malaysian deposit that will accumulate to 300,000 ringgit in 90 days. This implies that the number of U.S. dollars to be borrowed now is (291,262 × $.404) = $117,670. If this amount is borrowed today, Santa Barbara will need $122,377 to repay the loan in 90 days (computed...
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