Solution: US dollar value = $2.0032 x £10,000,000 = $20,032,000 18. What will be the approximate value of the accounts receivable in US dollars if the company makes a money-market hedge?
A. about $20,051,000
* B. about $20,093,000
C. about $20,151,000
D. about $20,293,000
E. about $30,000,000
Solution: (1) borrow £9,708,738 (10,000,000/1.03)
(2) buy $19,699,030 in exchange for £9,708,739
(3) invest $19,699,030 in the US at 2%
(4) receive $20,093,010 ($19,699,031 x 1.02) Use the following information to answer the next five questions:
A subsidiary in Israel requires the Israel shekel equivalent of $1 million at the current exchange rate of 4 shekels per dollar. To obtain 4 million shekels for the subsidiary in Israel, the parent must open a $1 million credit in favor of as Israeli bank. The Israeli bank charges the parent 10% per year on the 4 million shekels made available to the subsidiary and pays no interest on the $1 million that the parent has deposited in favor of the bank. The parent's opportunity cost on the $1 million deposit is 20%. Two financing alternatives are direct loan and credit swap.
19. If the current exchange rate stays the same, which alternative is less expensive: direct loan or credit swap?
