Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to each multiple choice question.
Each question is worth 2 marks

A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six months’ time from a
customer in a foreign country. The following interest rates and exchange rates are available to the company:
Spot rate                                                                       15·00 peso per $
Six-month forward rate                                                15·30 peso per $
                                                                                       Home country                    Foreign country
Borrowing interest rate                                                     4% per year                          8% per year
Deposit interest rate                                                         3% per year                          6% per year
Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money-market hedge?
A $32,500
B $33,700
C $31,800
D $31,900

Answer：

A
The hedge needs to create a peso liability to match the 500,000 peso future income.
6-month peso borrowing rate = 8/2 = 4%
6-month dollar deposit rate = 3/2 = 1·5%
Dollar value of money market hedge = 500,000 x 1·015/(1·04 x 15) = $32,532 or $32,500

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