Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (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. The following were computed without rounding.Select the answer closest to yours.

Question

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (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.  The following were computed without rounding.Select the answer closest to yours.

Quizplus · Accepted Answer

To redenominate the receivable into Euros, we need to borrow 1,000,000/1.20 = EUR 833,333.33 in the Eurozone for a year to match the payment. 
Using a money market hedge, we can invest the sterling equivalent of EUR 833,333.33 in the UK for one year at the current risk-free rate, which is approximately 0.45%. 
The amount we need to invest in sterling is 833,333.33/1.45 = £573,771.93. 
Therefore, the amount of money we need to borrow in sterling is £573,771.93 - £109,897.52 (which is the sterling equivalent of SFr.1,000,000 at current exchange rates) = £463,874.41. 
So, the closest answer is B (£464,874.41).

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