10. Money Market Hedge of Payables. Hawkes Imports, a U.S firm, imports sauvigno

Question

10. Money Market Hedge of Payables. Hawkes Imports, a U.S firm, imports sauvignon blanc wines from New Zealand. It has payables of New Zealand dollars (NZD) 1,000,000 in six month. The treasurer of Hwakes is considering a money market hedge and is faced with the following data:

NZD spot USD 0.62

NZD 6- month forward USD 0.60

USD rate, lending 4%

USD rate, borrowing 4.3%

NZD rate, lending 5%

NZD rate, borrowing 6.2 %

Show the steps involved in this hedge and net cash flow ( cost) of meeting the payables. Assume annual compunding.

11. Money Market Hedge of Receivables . Tom Turbines, a U.S firm, export windmills to New Zealand and expects receivables of New Zealand dollar (NZD) 2,500,000 in six months. Using the information from problem 10 , demonstrate how the firm can use the money market hedge to protect its receivables position.

Explanation / Answer

1. Account Payable NZD 1 Million in 6 months.

PV = NZD 1,000,000 / 1.025 = NZD 975,609.80

PV in USD = 975,609.80 * 0.62 USD / NZD = $ 604,878.05

a. Borrow $ 604,878.05 in US @ 4.3%.

b. Purchase NZD 975,609.80 & invest in New Zealand @ 5%

c. In six months pay $ 617,882.90

Net Cash Flow of meeting the payables would be as follows:

Realization from Investment in New Zealand = NZD 1,000,000

Payments to Accounts Payable = NZD 1,000,000

Net Cash Flow in New Zealand = NIL

Payment to Borrowings in US = USD 617,882.90

So cost of USD to NZD = 0.6179 USD / NZD

2. Account Receivable NZD 2.5 Million in 6 months.

PV = NZD 2,500,000 / 1.031 = NZD 2,424,830.26

PV in USD = 2,424,830.26 * 0.62 USD / NZD = $ 1,503,394.76

a. Borrow NZD 2,424,830.26 in New Zealand @ 6.2% for 6 months

b. Purchase USD 1,503,394.76 & invest in US @ 4 % for 6 months

c.In six months pay loan of NZD 2,500,000 with receivables of NZD 2,500,000

Net Cash Flow on account of investment = USD 1,533,462.66

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