MC Question 25
You will get this Formula Table at the exam so learn well how to apply it in your FM (F9) Exam
ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. ZPS Co does not have any income in pesos. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable.
ZPS Co must pay interest on the dates set by the bank. A payment of 5,000,000 pesos is due in six months’ time. The following information is available:
Spot rate | 12·500–12·582 pesos per $ |
Six-month forward rate | 12·805–12·889 pesos per $ |
Borrow | Deposit | |
---|---|---|
Peso interest rates | 10·0% per year | 7·5% per year |
Dollar interest rates | 4·5% per year | 3·5% per year |
ZPS Co also trades with companies in Europe which use the Euro as their home currency. In three months’ time ZPS Co will receive €300,000 from a customer.
Which of the following is the correct procedure for hedging this receipt using a money market hedge?
A. | Step 1 | Borrow an appropriate amount in Euro now |
---|---|---|
Step 2 | Convert the Euro amount into dollars | |
Step 3 | Place the dollars on deposit | |
Step 4 | Use the customer payment to repay the loan | |
B. | Step 1 | Borrow an appropriate amount in dollars now |
Step 2 | Place the dollars on deposit now | |
Step 3 | Convert the dollars into Euro in three months’ time | |
Step 4 | Use the customer payment to repay the loan | |
C. | Step 1 | Borrow an appropriate amount in dollars now |
Step 2 | Convert the dollar amount into Euro | |
Step 3 | Place the Euro on deposit | |
Step 4 | Use the customer payment to repay the loan | |
D. | Step 1 | Borrow an appropriate amount in Euro now |
Step 2 | Place the Euro on deposit now | |
Step 3 | Convert the Euro into dollars in three months’ time | |
Step 4 | Use the customer payment to repay the loan |