HW 4 Solutions

# HW 4 Solutions - Suggested Solution to HW 4 Slide 47 of...

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1 Suggested Solution to HW 4 Slide 47 of Lecture 8 : To use the money market to hedge her €100,000 shoe sale receivable in one year, the American exporter can do the following: Step 1: Borrow the present value of €100,000 for one year, that is, €100,000/(1+5%)=€95,238.10 today (i.e., t=0). Step 2: Exchange €95,238.10 for \$119,047.62 (=€95,238.10×\$1.25/€1.00) at the prevailing spot rate of \$1.25/€1.00. What is going to happen afterwards? She invest the \$119,047.62 proceeds on the U.S. \$-denominated debt for one year, earning 7.10% interest; At maturity (i.e., t=1), she will owe €100,000 which can be paid off with her receivable; At maturity (i.e., t=1), she will collect \$127,500.00 from her \$ investment; She will have no exposure to the dollar-euro exchange rate. Problem 8.4 : (a) In the case of forward hedge, the future dollar proceeds will be (20,000,000)(1.10) = \$22,000,000. In the case of money market hedge (MMH), the firm has to first borrow the PV of

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HW 4 Solutions - Suggested Solution to HW 4 Slide 47 of...

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