You are a car dealer in Nashville and import Mercedes-Benz from Germany. You have just signed a deal to import 100 cars.
Posted: Fri Mar 04, 2022 9:44 am
You are a car dealer in Nashville and import
Mercedes-Benz from Germany. You have just signed a deal to import
100 cars. The deal is denominated in Euros, and you will pay
€5,000,000 when the cars arrive in Nashville in 90 days. Assume
that you can borrow and lend at 6% p.a. in U.S. dollars and at 10%
p.a. in Euros. Both interest rate quotes are for a 360-day year.
The spot exchange rate is $1.36/€, and the 90-day forward exchange
rate is $1.32/€. It is known that there are a couple of ways to
hedge your foreign currency liability: forward hedge and money
market hedge. Which hedge should be preferred for you? Show all the
details.
Mercedes-Benz from Germany. You have just signed a deal to import
100 cars. The deal is denominated in Euros, and you will pay
€5,000,000 when the cars arrive in Nashville in 90 days. Assume
that you can borrow and lend at 6% p.a. in U.S. dollars and at 10%
p.a. in Euros. Both interest rate quotes are for a 360-day year.
The spot exchange rate is $1.36/€, and the 90-day forward exchange
rate is $1.32/€. It is known that there are a couple of ways to
hedge your foreign currency liability: forward hedge and money
market hedge. Which hedge should be preferred for you? Show all the
details.