Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?

Question

Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?​

Quizplus · Accepted Answer

To determine how much to borrow in the United States, we need to calculate the present value of €1,000,000 at the German interest rate and compare it to the present value of the same amount at the US interest rate, considering the exchange rate. 
PV (€1,000,000) at 5% for 30 days = €998,630.14 
PV (€1,000,000) at 6% for 30 days = €996,415.86 
Converting both values to dollars using the spot rate of $1.00: 
PV (€1,000,000) at 5% = $998,630.14 
PV (€1,000,000) at 6% = $996,415.86 / $1.00 = $996,415.86 
Since the present value is lower at the US borrowing rate, Samson should borrow the amount needed in the United States. 
The amount to borrow in the US is: 
$996,415.86 / (1 + 6% x 30/360) = $995,850.80 ≈ $995,851. 
Therefore, the correct answer is B.