ABC Inc. is an importer that has a £20M account payable (AP) due in 90 days. Hedging this AP in money markets allows ABC to lock the current spot rate. An importer has to borrow in home currency, convert to foreign currency and invest the foreign currency in the foreign money market. Annual borrowing and investment interest rates are 5 and 3% in the U.K. and 9 and 7 % in the U.S. respectively, current $/£ spot exchange rate are 1.75$/£ and as of today. 

If the forward rate is 1.77$/£ is ABC better off using the money market hedge? 

By how much ABC is better off (or worse off) using money market hedge instead of forwarding rate (give the answer in dollars at the time when AP are due)?

Answer rating: 100% (QA)

1 Money market hedge Step 1 Borrow 3474 M 9 for 90 days Step 2 Conver... View the full answer