Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?

Question

Quizplus · Accepted Answer

1.Borrow $995,851 from a U.S. bank (€1,000,000× $1.00 × [1 + (.05 × 30/360)]
2.Convert $995,851 to €995,851, given the exchange rate of $1.00 per euro.
3.Use the euros to purchase a German security that offers 0.42% interest over 30 days.
4.Repay the U.S. loan in 30 days, plus interest; the amount owed is $1,000,830 (computed as $995,851 × [1 + (.06 × 30/360)]).

Blake Inc Needs €1,000,000 in 30 Days