The following information is to be used in answering questions 36?38.
U.S. borrowing rate for 1 year = 9.5%
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
-value can Alcoa lock in for a receivable of FF 3 million due in one year if it executes a money market hedge today?
A) $525,540
B) $516,545
C) $530,012
D) $520,940

Question

Quizplus · Accepted Answer

To lock in the value using a money market hedge, Alcoa would convert the FF 3 million receivable into USD today at the spot rate, and invest the USD at the U.S. deposit rate. The spot rate is $0.1763, so FF 3 million is converted to $528,900. Investing this at 8.7% for one year gives $528,900 / (1 + 0.087) = $516,545.

The Following Information Is to Be Used in Answering Questions