Columbus Surgicals Inc. is based in US, has recently imported surgical raw materials from the UK and has been invoiced for £ 480,000, payable in 3…

£ Exposure Since Columbus has a £ receipt (£ 138,000) and payment of (£ 480,000) maturing at the same time i.e. 3 months, it can match them against each other leaving a net liability of £ 342,000 to be hedged. (i) Forward market hedge Buy 3 months' forward contract accordingly, amount payable after 3 months will be £ 342,000 / 0.9520 = US$ 359,244 (ii) Money market hedge To pay £ after 3 months' Columbus shall requires to borrow in US$ and translate to £ and then deposit in £. For payment of £ 342,000 in 3 months (@2.5% interest) amount required to be deposited now (£ 342,000 ÷ 1.025) = £ 333,658 With spot rate of 0.9830 the US$ loan needed will be = US$ 339,429 Loan repayable after 3 months (@3.25% interest) will be = US$ 350,460 In this case the money market hedge is a cheaper option. € Receipt Amount to be hedged = € 590,000 (i) Forward market hedge Sell 4 months' forward contract accordingly, amount receivable after 4 months will be (€ 590,000 x1.9510) = US$ 1,151,090 (ii) Money market hedge For money market hedge Columbus shall borrow in € and then translate to US$ and deposit in US$ For receipt of € 590,000 in 4 months (@ 5.33% interest) amount required to be borrowed now (€590,000 ÷ 1.0533) = € 560,144 With spot rate of 1.8890 the US$ deposit will be = US$ 1,058,113 Deposit amount will increase over 4 months (@3.83% interest) will be = US$ 1,098,639 In this case, more will be received in US$ under the forward hedge.