The Australian Dollar (A$) 6-month borrowing rate is 6.50% per annum and the Australian Dollar (A$) 6-month investment rate is 3.50% per annum.
The Euro (€) 6-month borrowing rate is 4.40% per annum and the Euro (€) 6-month investment rate is 1.18% per annum.
An Australian organisation is expecting to use money market hedging both for its account payables and account receivables. The organisation's weighted average cost of capital is 14% per annum.
The current spot exchange rate between Euro (€) and Australian Dollar (A$) is A$1.55/€.
(a) Determine the cost for money market hedging for a cash flow of €3.5 million due to a supplier in 6 months.
(b) Determine the proceed for money market hedging for a cash flow of €2.2 million due from a customer in 6 months.
