Answer:
Dollar cost of the foreign payable = $ 6,653,833.28
Explanation:
The money market hedge would be set up as follows:
<em>Step 1: Deposit in Yen (Tokyo)</em>
Deposit an amount in Yen equal to
Amount to be deposited= Payable/(1+deposit rate)
= 750,000,000/(1.03)
= Yen 728,155,339.8
<em>Step 2 : Convert the sum</em>
Convert Yen 728,155,339.8 at the spot rate of yen 116 per $
Dollar amount = 728,155,339.8
/ 116
= $ 6,277,201.205
<em>Step 3: Borrow at home (US)</em>
Borrow $ 6,277,201.205 for one year at an interest rate of 6%
Amount due (inclusive of interest) = Amount borrowed × 1.06
=$ 6,277,201.205
× 1.06
= $ 6,653,833.28
Dollar cost of the foreign payable = $ 6,653,833.28
