ACCA FM · Chapter 14 · Question 4 of 10
A UK company must pay €400,000 in three months. The spot rate is €1.1500 per £1. The company can deposit euros at 2% a year and borrow sterling at 6% a year. What is the sterling cost of the payment, in three months' time, using a money market hedge (to the nearest £)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) £351,287
Explanation
Deposit enough euros now to grow to €400,000 in three months: 400,000 / 1.005 = €398,010. Buy these euros at spot: €398,010 / 1.1500 = £346,096, borrowed in sterling. Repay the sterling loan with three months' interest at 1.5%: £346,096 x 1.015 = £351,287. Using annual rather than three-month interest rates gives £361,466.
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