ACCA FM · Chapter 14 · Question 3 of 10
A UK company will receive $1,000,000 in six months. The spot rate is $1.3000 per £1. The company can borrow in dollars at 5% a year and deposit in sterling at 3% a year. Using a money market hedge, how much sterling will the company have in six months (to the nearest £)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) £761,726
Explanation
Borrow dollars now so that the loan plus 6 months' interest equals the receipt: $1,000,000 / 1.025 = $975,610. Convert at spot: $975,610 / 1.3000 = £750,469. Deposit in sterling for 6 months at 1.5%: £750,469 x 1.015 = £761,726. The dollar receipt repays the loan. Using full annual rates instead of six-month rates gives £754,579.
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