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Homework answers / question archive / Coleman Co, an Australian company, will pay 2
Coleman Co, an Australian company, will pay 2.56 million Malaysian ringgit (MYR) to its’ Malaysian supplier in one-year. To avoid transaction exposure, the company wants to take the money market hedge strategy using the spot rate A$0.4494/MYR and 6.01% deposit rate of MYR. What is the cost of money market hedge for Coleman Co. with 4.48% borrowing rate of A$? (enter the whole number without sign or symbol).
Here the Australian company has to pay MYR in one year
Inorder to avoid transaction exposure it has entered into money market hegde
That means ,
The Australian company will buy MYR spot and invest the same in Malaysia so that maturity proceed will be equal to the payable amount to the supplier in 1 year time.
Amount Payable = 2.56 Million
Interest rate is 6.01%
Amount to invest in Malaysia is 2.56/1.061( Nothing but the present value of MYR payable)
= 2.412818 Million MYR
Now , The Australian entity has to buy this much MYR spot using A$
Amount of A$ required to buy MYR is (2.56/1.061) * 0.4494 = 1.08432 A$
Now this amount has to be borrowed at 4.48% in Australia
Hence the final settlement amount after 1 year will be 1.132898 A$ ( 1.08432 + 1.08432*4.48%)
