Samesong ltd. needs €1,000,000 in 30 days. Samesong can earn 5 percent annualized on a German security. The current spot rate for the euro is £0.67. Samesong can borrow funds in the UK at an annualized interest rate of 6 per cent. If Samesong uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?
A) £641,832
B) £680,152
C) £670,556
D) £670,000

Question

Quizplus · Accepted Answer

To hedge the payable using a money market hedge, Samesong would need to invest in euros today to have €1,000,000 in 30 days. The present value of €1,000,000 at a 5% annual interest rate for 30 days is approximately €995,851. The cost in pounds is €995,851 * £0.67 = £667,220. Samesong would borrow this amount in the UK at a 6% annual interest rate for 30 days, resulting in a cost of approximately £670,556.

Samesong Ltd