The Australian Dollar (A$) 2-month borrowing rate is 6.50% per annum and the Australian Dollar (A$) 2-month investment rate is 3.50% per annum. The Euro (€) 2-month borrowing rate is 4.40% per annum and the Euro (€) 2-month investment rate is 1.18% per annum. An Australian company is expecting to use money market hedging both for its account payables and account receivables. The company's capital structure comprises 35% debt and 65% equity. The CFO of the company estimates that the risk-free rate is 2.2%, and the company's credit risk premium is 5.3%. The correlation coefficient between the returns from the company's shares and that from the market is 0.77. The standard deviation of returns from the company's shares is 8% The standard deviation of returns from the market is 11% The expected rate of return on a well-diversified market portfolio held by an investor is 14%. The corporate income tax rate is 25%. 

Determine the cost for money market hedging for a cash flow of €2 million due to a supplier in 2 months, and the proceed for money market hedging for a cash flow of €2.2 million due from a customer in 2 months.

Answer rating: 100% (QA)

To determine the cost and proceeds for money market hedging we need to calculate the following The f... View the full answer