Assume the following information:
U.S.deposit rate for 1 year = 11%
U.S.borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S.exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above,what will be the approximate value of these exports in 1 year in U.S.dollars given that the firm executes a money market hedge
A) $238,584.
B) $240,000.
C) $234,000.
D) $236,127.

Question

Assume the following information:
U.S.deposit rate for 1 year = 11%
U.S.borrowing rate for 1 year   = 12%
New Zealand deposit rate for 1 year   = 8%
New Zealand borrowing rate for 1 year   = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate   = $.39
Also assume that a U.S.exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year.  You are a consultant for this firm.
Using the information above,what will be the approximate value of these exports in 1 year in U.S.dollars given that the firm executes a money market hedge
A) $238,584.
B) $240,000.
C) $234,000.
D) $236,127.

Quizplus · Accepted Answer

To determine the value of the exports in 1 year, we need to use the money market hedge formula:

Forward rate = spot rate x (1+i (foreign))/ (1+i (domestic))

Where i is the interest rate.

In this case, we are using the New Zealand dollar as the foreign currency and the US dollar as the domestic currency.

Using the given information:
- Spot rate = $.39
- Forward rate = $.40
- Foreign interest rate = 8%
- Domestic interest rate = 11%

$.40 = $.39 x (1+.08)/(1+.11)

Solving for the unknown, we get:

$.40 = $.39 x 1.0727

$.40/$.39 = 1.0927

1.0927 x $600,000 = $655,620

Therefore, the value of the exports in 1 year in US dollars with a money market hedge is approximately $236,127.

Assume the Following Information