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Calculate the exchange rates that will apply if the money market hedges are used for the exports to Canada (Complete Table 6 on the separate answer sheet)

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Forward rates:

Currencies Spot 3 month (90 days) 6 month (180 days) 9 month (270 days) 12 month (360 days)
$/CAD 0.76465 0.76559 0.77475 0.76748 0.76843
$/AUD 0.72390 0.72516 0.72641 0.72766 0.72892

Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Country 3 month rates 6 months rates 9 month rates 12 month rates
Borrow Invest Borrow Invest Borrow Invest Borrow Invest
United States 2.687% 2.554% 2.713% 2.580% 2.740% 2.607% 2.766% 2.633%
Canada 2.177% 2.069% 2.198% 2.090% 2.220% 2.112% 2.241% 2.133%
Australia 1.973% 1.875% 1.992% 1.894% 2.012% 1.914% 2.031% 1.933%

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.


Table 6: Canada export with money market hedge: (8 marks)

PV of foreign currency to be borrowed Converted at spot to $ for investment $ amount with interest invested Exchange rate locked in with transaction
Show your workings and answers in the columns

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