Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (in Swiss francs)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. A)£500,000 B)£464,874.41 C)£446,730.77 D)£509,900.99

Question

Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (in Swiss francs)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. A)£500,000 B)£464,874.41 C)£446,730.77 D)£509,900.99

Quizplus · Accepted Answer

To redenominate the receivable into euros, we need to buy euros at the current exchange rate (EUR/CHF) and invest them for one year to match the payment due date. So, we need to calculate the present value of 1,000,000 CHF in euros using the current EUR/CHF exchange rate and the interest rates for one-year deposits in each currency. Then, we need to convert this amount into pounds using the current EUR/GBP exchange rate. Using this method, we get a value of £464,874.41, which is closest to choice B.

Your Firm Is a U