International Finance
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11. Forward versus Money Market Hedge on Payables. Assume the following information:
90-day U.S. interest rate = 4%
90-day Malaysian interest rate = 3%
90-day forward rate of Malaysian ringgit = $.400
Spot rate of Malaysian ringgit = $.404
Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
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ANSWER:
If the firm uses the forward hedge, it will pay out 300,000($.400) = $120,000 in 90 days.
If the firm uses a money market hedge, it will invest ...
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