Section B - Case 3: GlobalLogix
Scenario: GlobalLogix is a cross-border logistics firm based in the Eurozone (€). The company expects to receive $2,000,000 from a US client in 3 months' time.
Current spot rate ($/€): 1.1500 - 1.1550
3-month forward rate ($/€): 1.1600 - 1.1660
Eurozone interest rates: Borrow 2.0% per year, Deposit 1.0% per year.
US interest rates: Borrow 4.0% per year, Deposit 3.0% per year.
If GlobalLogix uses a forward contract to hedge this receipt, how many Euros (€) will they receive in 3 months?
ACCA · Question 27 · Risk Management
Section B - Case 3: GlobalLogix
Scenario: GlobalLogix is a cross-border logistics firm based in the Eurozone (€). The company expects to receive $2,000,000 from a US client in 3 months' time.
Current spot rate ($/€): 1.1500 - 1.1550
3-month forward rate ($/€): 1.1600 - 1.1660
Eurozone interest rates: Borrow 2.0% per year, Deposit 1.0% per year.
US interest rates: Borrow 4.0% per year, Deposit 3.0% per year.
GlobalLogix is considering a money market hedge instead of a forward contract. What is the correct sequence of steps to set up this hedge today?
Answer options:
Borrow Euros, convert to US Dollars at the spot rate, and deposit the US Dollars.
Borrow US Dollars, convert to Euros at the spot rate, and deposit the Euros.
Deposit US Dollars today and convert them to Euros in 3 months at the forward rate.
Borrow US Dollars, convert to Euros at the forward rate, and deposit the Euros.
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