Samsong Inc.needs €1,000,000 in 30 days.Samsong can earn 5 percent annualized on a German security.The current spot rate for the euro is $1.00.Samsong can borrow funds in the U.S.at an annualized interest rate of 6 percent.If Samsong uses a money market hedge,how much should it borrow in the U.S.
A) $952,381.
B) $995,851.
C) $943,396.
D) $995,025.

Question

Quizplus · Accepted Answer

To find out how much Samsong should borrow in the US with a money market hedge, we need to calculate the forward rate for the euro.

Forward rate = spot rate x (1 + foreign interest rate / domestic interest rate)^(days/360)

Forward rate = 1 x (1 + 0.05 / 0.06)^(30/360)

Forward rate = 1.001383

Then, we can calculate how much Samsong needs to borrow in the US:

Amount to borrow = €1,000,000 / forward rate

Amount to borrow = €998,616.24

Finally, we convert this amount to dollars at the spot rate:

Amount to borrow = €998,616.24 x $1.00/€

Amount to borrow = $998,616.24

Therefore, the best choice is B ($995,851) as it is the closest option to our calculated amount.