Answered: U.S. deposit rate for 1 year = 11.5%…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 4ST

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U.S. deposit rate for 1 year	=	11.5%
U.S. borrowing rate for 1 year	=	12%
Swiss deposit rate for 1 year	=	9%
Swiss borrowing rate for 1 year	=	10%
Swiss forward rate for 1 year	=	$.40
Swiss franc spot rate	=	$.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF700, 000 in 1 year. Suppose you have money market and forward hedge opportunities available.

a. If you hedge using money market, what will be the approximate value of your exports in 1 year in U.S dollars?

b. What will be the approximate value of your exports in 1 year in U.S dollars if you use forward hedge?

c. Which method do you use? Why?

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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