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 to hedge the payable,what is the cost of implementing the hedge
A) $1,000,000.
B) $1,055,602.
C) $1,000,830.
D) $1,045,644.

Question

Quizplus · Accepted Answer

To use a money market hedge, Samsong needs to borrow US dollars at 6% and convert them to € at the spot rate of $1.00. This would give them $1,000,000 / $1.00 = €1,000,000.
Samsong would then invest the €1,000,000 in the German security, earning 5% annualized. In 30 days, they would receive:
€1,000,000 x (5% / 365 x 30) = €4,110.96
To repay the borrowed funds, Samsong would need to convert the €1,000,000 back into dollars at the 30-day forward rate. Let's assume the 30-day forward rate is $1.008. This means Samsong would receive:
€1,000,000 x $1.008 = $1,008,000
To calculate the cost of implementing the hedge, we need to subtract the amount received from the German security from the amount needed to repay the borrowed funds:
$1,008,000 - $1,000,000 = $8,000
This is the cost of implementing the hedge, which is answer choice C.