A U.S.Company has a 40,000 euro loan in Germany that must be paid in 30 days.Assume the 30-day money market rates in the U.S.and Germany are both 2% for lending and 3.5% for borrowing.The current exchange rate is 1.55 dollars per euro.If the company wants to complete a money-market hedge,how many euros will be invested in the German money market?

Question

Quizplus · Accepted Answer

To complete a money-market hedge, the company will borrow the euro amount in the German money market for 30 days and convert it to dollars at the current exchange rate.

To calculate the amount of euros needed, we first need to calculate the amount of dollars needed to pay back the loan:
40,000 euros x 1.55 dollars/euro = $62,000

Next, we need to calculate the interest expense for borrowing euros in Germany:
40,000 euros x 2% interest rate = 800 euros

To convert this interest expense to dollars, we use the current exchange rate:
800 euros / 1.55 dollars/euro = $1,032

Therefore, the total dollars needed to complete the money-market hedge is:
$62,000 + $1,032 = $63,032

To calculate the amount of euros needed to borrow in the German money market, we divide the dollars needed by the euro interest rate:
$63,032 / 2% = 3,151,600 euros

Therefore, the best choice is C) 39,215.69 euros, as it is the closest option to 3,151,600 euros.

A USCompany Has a 40,000 Euro Loan in Germany That Must