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Canada Export Inc
Canada Export Inc. (CEI) is a Canadian MNC that needs to pay €240,000 in one year to a German supplier. The current spot rate is CAD$ 1.50 per €. The interest rate in Canada is 3 percent and the interest rate in Germany is 4 percent. CEI decides to use a money market hedge to mitigate all of exchange rate risk. What is the €240,000 payables worth in CAD$?
| A. |
CAD$ 158,462. |
|
| B. |
CAD$ 161,553. |
|
| C. |
CAD$ 356,538. |
|
| D. |
CAD$ 363,495. |
|
| E. |
CAD$ 360,000. |
Expert Solution
The payment is hedged as follows :
- An amount equal to the present value of the € payable amount, discounted at the € interest rate, is required to be deposited today. € to deposit today = €240,000 / (1 + 4%) = €230,769.23
- An amount equal to the $ equivalent of €230,769.23 is borrowed today. The exchange rate applied here will be the spot exchange rate. $ borrowed today = €230,769.23 * 1.50 = $346,153.85
- $ to repay after 1 year = $346,153.85 * (1 + 3%) = $356,538.46
- $ payable amount (rounded off) = $356,538
The answer is C
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