Assume that Apex Inc., a US based company, sells merchandise to Quigley Inc., an Australian importer and has to denominate the sale in Australian dollars with payment to be received in 90 days. Apex will receive A$500,000 from Quigley. In order to hedge the receivable, Apex decides to borrow Australian dollars for 90 days at 10 percent and deposit the Australian dollars in an interest-bearing account.
a) How much will Apex have to borrow to cover its receivable?
b) If Apex deposits the money in an interest-bearing account yielding 8 percent, what will be the cash received from the sale, assuming no tax effect? The spot rate at the beginning of the transaction is A$1.2907 per US dollar, and the rate 90 days later is A$1.3500.