Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?

Question

Business

Adam Lowe

4 March, 07:38

Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?

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Answers (1)

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Taz · Answer 1

If Samson uses a money market hedge, it should borrow $952,381 in the United States.

Explanation:

Amount required in 30 days = Euro 1,000,000

Required to be deposited in Euro = Present value

= 1,000,000 / (1.05)

= Euro 952,380.95

Required borrowings in Dollars = Amount required in Euro*Spot rate

= 952,381*1

= $952,381