Question 10 2 pts ABC, a U.S. based MNC, plans to use a money market hedge to he

Question

Question 10 2 pts ABC, a U.S. based MNC, plans to use a money market hedge to hedge its payment of 5 million New Zealand dollars (NZD) for NZ goods in 2 years. The nominal annual U.S. interest rate is 6% while that of NZ is 10%. The spot rate of the NZD is $0.68 while the 2 year forward rate is $0.63. What is the amount of U.S. dollars needed in 2 years if a money market hedge is used rounded to the nearest whole dollar amount? Time Ru Attempt du 28 Minut $3,276,637 o $3,157,223 $3.276.364 $5,000,000

Explanation / Answer

Solution:

Newzeland dollars to be paid after 2 years = 5,000,000 NZD

Now deposit rate in NZ is 10%

Therefore in order to use money market hedge amount to be invested today in newzealand to get 5,000,000 NZD after 2 years = 5,000,000 / (1.10)^2 = 4,132,231NZD

Now to invest $4,132,231 NZD, we have to borrow US $ at spot rate = 4,132,231 * 0.68 = $2,809,917

After 2 years payment of USD with interest = $2,809,917 * (1.06)^2 = $3,157,223

Hence US dollar needed in 2 years if money market hedge is used = $3,157,223

2nd option is the right choice.

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