Your firm is an Italian importer of British bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size Country U.S. $ equiv. Currency per U.S. $ interest rates APR

£ 10,000 Britain (pound) 1.9600 £ 0.5102

12 months forward 2.0000 £ 0.5000

€ 10,000 Euro 1.5600 € 0.6410 ⁱ$ = 1%

12 months forward 1.6000 € 0.6250 ⁱ€ = 2%

SFr. 10,000 Swiss franc 0.9200 SFr. 1.0870 ⁱ£ = 3%

12 months forward 1.0000 SFr. 1.0000 ⁱSFr. = 4 4%

The following were computed without rounding.Select the answer closest to yours.

Question

Your firm is an Italian importer of British bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	ⁱ$ =	1%
	12 months forward	1.6000	€ 0.6250	ⁱ€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	ⁱ£ =	3%
	12 months forward	1.0000	SFr. 1.0000	ⁱSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

Quizplus · Accepted Answer

To use a money market hedge, we need to borrow in pounds for one year and convert the total amount into euros today. Then, we can invest in euros at the euro deposit rate for one year. At maturity, we convert the euros back into pounds at the spot rate.

Step 1: Borrowing in pounds at the one-year interest rate of 5% per annum

£1,000,000 x 1.05 = £1,050,000

Step 2: Converting the pounds into euros at the spot rate of £1 = 1.25 euro

£1,050,000 / 1.25 = €1,260,000

Step 3: Investing the euros at the one-year euro deposit rate of 3% per annum

€1,260,000 x 1.03 = €1,298,000

Step 4: Converting the euros back into pounds at the spot rate of 1 euro = £0.96

€1,298,000 x 0.96 = £1,244,480

Therefore, the euro-denominated receivable with a one-year maturity is €1,298,000, which is closest to answer B) €1,244,212.10.

Your Firm Is an Italian Importer of British Bicycles