Derivatives
Answer 1) In case, the company use 90-day forward contract, it will be required to pay: =300000*(0.40) = $120000
On the other hand, if it go by money market hedge, initially, it will invest:
=300000/1.03 = 291262 ringits In other words, in order to accumulate 300000 ringits in 90 days, the firm will need to deposit 291262 ringits presently. Henceforth, the firm will need to borrow, 291262* 0.404= $117,670 in the spot market.
The borrowed amount will be paid after 90-days with 4% interest, and this compute to:
= 117,670*(1.04) = $122,377 Therefore, by using the money market hedge, firm will need to pay $2377 more than the forward hedge. Hence, it should go for the forwar hedge
Answer 2)
Steps to hedge in the money market a) Borrow, 4000000/1.08= ...
