Suppose INTC has a 5 billion USD worth of profit it is expecting to collect from its subsidiary in Hong Kong in 12 months. The current exchange rate is at $7.7885 HKD per $1 and the interest rate in Hong Kong is 3.5% and the interest rate in the US is 2.5%? The one year forward rate available to INTC is $7.8825. Should INTC carryout a Money Market Hedge or forward hedge?
Answer:-
Given
The exchange rate = $7885 HKD / $
Interest rate in HK ( RHK) =3.5% = 0.035
Interest rate in US (RUS) = 2.5% = 0.025
The Forward rate =Spot rate x [ (1 + RHK ) / ( 1 + RUS) ] = 7.7885
x (1.035 / 1.025) = 7.7885 x 1.009756 = $ 7.8645 HKD /
$1
Since the forward rate available to INTC is $ 7.8825 / $ 1 is more than the forward price calculated $ 7.8645 HKD / $1 one carry hedge the forward rate as the profit will be more in case of forward hedge than the money market hedge.
Therefore INTC should carry a forward hedge of $ 7.8825 HKD / $ 1.
Suppose INTC has a 5 billion USD worth of profit it is expecting to collect from...
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