On 10th February 2016, KILPATRICK LIMITED a company based in the united kingdom sold goods worth $2,000,000 to a company in canada and gave three months credit. The canadian company is therefore expected to pay kilpatrick limited by 10th May, 2016. The company expects the british pound to appreciate against the canadian dollar and wants to lock into the current exchange rate of $1.85/£.
The management of kilpatrick limited have been advised to set up a money market hedge using the euro currency markets in order to insulate the company against any transaction exposure. Currently, the canadian dollar borrowing rate on the euro currency market is 9% per annum and the sterling deposit rate is 8% per annum.
Required;
How is the preference interest rate for the euro currency markets determined?