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Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days.

12. Forward versus Money Market Hedge on Receivables. Assume the following information:

180-day U.S. interest rate = 8%
180-day British interest rate = 9%
180-day forward rate of British pound = $1.50
Spot rate of British pound = $1.48

Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.

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ANSWER:

If the firm uses a forward hedge, it will receive 400,000($1.50) = $600,000 in 180 days.

If the firm uses a money market hedge, it will borrow ...

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