【正确答案】Forward market hedge: The dollar value of a forward market hedge in six months’ time can be calculated: Future value = 750,000/2·412 = $310,945 Money market hedge: Rose Co is expecting a euro receipt in six months’ time and it can hedge this receipt in the money markets by borrowing eurosto create a euro liability. These euros can be converted into dollars at spot and then placed on deposit for six months. Euro borrowing rate for 6 months = 8·0/2 = 4% Dollar deposit rate for 6 months = 2·0/2 = 1% Euros to be borrowed now = 750,000/1·04 = €721,154 Dollar value of these euros at spot = 721,154/2·349 = $307,005 Future value of dollar deposit = 307,005 x 1·01 = $310,075 The forward market hedge would be better by 310,945 –310,075 = $870 and would therefore be preferred on financialgrounds by Rose Co.

【正确答案】A forward rate agreement (FRA) can fix the borrowing rate on a sum of money for an agreed period starting on an agreedfuture date. A company can use an FRA to manage interest rate risk because the FRA fixes the future borrowing rate for an agreed period,and hence fixes the company’s future borrowing cost. If the future interest rate paid by the company turns out to be higher than the borrowing rate in the FRA, the bank willcompensate the company with the difference between the two rates applied to the agreed sum for the agreed period. If thefuture interest rate paid by the company turns out to be less than the borrowing rate in the FRA, the opposite occurs and thecompany compensates the bank. The net effect is that the company is locked into the borrowing rate specified in the FRA.Because the company is locked into the FRA borrowing rate, the FRA does not allow the company to benefit from favourableinterest rate movements. The bank which is a party to the FRA does not need to be the same bank which offers the funds to be borrowed.