5 2 7 7 1 6 3 4 t o c o m p a re th e tw o w e n e

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Unformatted text preview: hese last Fme •  SyntheFc forward – borrowing/lending foreign currency and making a transacFon in the spot market •  Money market hedge – if an underlying transacFon gives you a liability, you use a money market asset to hedge the posiFon (and vice versa) 6.4 Hedging TransacFon Risk in the Money Market Hedging a foreign currency liability Z a c h y' s W i n e a n d S p i r i t s i s i m p o r t i n g s o m e w i n e f r o m F r a n c e f o r € 4 m i l l i o n . I t i s p a ya b l e i n 9 0 d a y s . S p o t e x c h a n g e r a te : 9 0 -d a y f o rw a r d : 9 0 - d a y d o lla r in t e r e s t r a te : 9 0 - d a y e u r o in t e r e s t r a te : $ 1 .1 0 /€ $ 1 .0 8 /€ 6 .0 0 % p .a . 1 3 .5 1 9 % p .a . C h o ic e # 1 : E n te r in to a fo r w a r d c o n tr a c t C o s t i n 9 0 d a ys i s : € 4 , 0 0 0 , 0 0 0 * ( $ 1 . 0 8 / € ) = $ 4 , 3 2 0 , 0 0 0 C h o ic e # 2 : M o n e y m a r k e t h e d g e I n v e s t X a m o u n t n o w t o b e c o m e w h a t yo u o w e i n 9 0 d a y s b ut ho w m u ch? € 4 ,0 0 0 ,0 0 0 /[ 1 + (1 3 .5 1 9 /1 0 0 )(9 0 /3 6 0 ) ] = € 3 ,8 6 9 ,2 2 9 .7 1 W e b u y th is @ S p o t r a te : € 3 ,8 6 9 ,2 2 9 .7 1 * $ 1 .1 0 / € = $ 4 ,2 5 6 ,1 5 2 .6 8 T o c o m p a re th e tw o , w e n e e d to ta k e th e P V o f th e f o rw a r d h e d g e $ 4 ,3 2 0 ,0 0 0 /[ 1 + (6 /1 0 0 )(9 0 /3 6 0 ) ] = $ 4 ,2 5 6 ,1 5 7 .6 4 F o r w a r d c o n tr a c t is m o r e e x p e n s iv e ( $ 4 .9 6 ) 6.4 Hedging TransacFon Risk in the Money Market Hedging a foreign currency receivable S h e tla n t S w e a te r s is s e llin g s w e a te r s to J a p a n e s e c u s to m e r s . T h e y w ill r e c e iv e ¥ 5 0 0 ,0 0 0 ,0 0 0 in 3 0 d a y s . S p o t e x c h a n g e r a te : 3 0 -d a y f o rw a r d : 3 0 - d a y d o lla r in t e r e s t r a te : 3 0 - d a y e u r o in t e r e s t r a te : ¥ 1 7 9 .5 / ¥ 1 8 0 /£ 2 .7 0 % p ....
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This note was uploaded on 07/17/2013 for the course FINS 3616 at University of New South Wales.

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