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Unformatted text preview: USD 0.0327 <== millions of USD Difference USD 32,707.22 <== USD Percent difference 0.533127745 Basis points 53.31277451 The answer is that the money market hedge is more expensive by 53 basis points, or USD 32,707. Grading: if a student demonstrates an understanding of the idea behind a money market hedge (borrow now, convert at spot, lend in FOREX) they should get no less than 8 points. Part B (5 points). Grading: for full marks, the student should show some understanding of `netting:' when one party in a forward agreement (or equivalently a swap) does not pay, neither does the other. The money market hedge is more susceptible to credit risk if the loan which the hedger makes in NOK is held by a different financial institution that the loan they received in USD. If this is the case, then a default by the former institution will result in a far greater loss than on the forward, where if one party does not pay the other party does not pay....
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- Spring '08