1. Montclair Co., a U.S. firm, plans to use a money market hedge to hedge its payment...
Question:
1. Montclair Co., a U.S. firm, plans to use a money market hedge to hedge its payment of 3 million Australian dollars for Australian goods in 1 year. The U.S. interest rate is 7 percent, while the Australian interest rate is 12 percent. The spot rate of the Australian dollar is $.85, while the 1-year forward rate is $.81. Determine the amount of U.S. dollars needed in 1 year if a money market hedge is used.
A$3000000/1+.12
2678571*.85
2279785*1.07
answer= $2,436,160.00
2. Using the information in the previous question, would Montclair Co. be better off hedging the payables with a money market hedge or with a forward hedge?
3. Using the information about Montclair from the first question, explain the possible advantage of a currency option hedge over a money market hedge for Montclair Co. What is a possible disadvantage of the currency option hedge?
Expert Answer:
1 As the firm has a future liability 1 year from now in AUD of 3000000 it should create a AUD asset ... View the full answer
