UNIVERSITY OF SOUTH AFRICA (UNISA)
College of Economic and Management Sciences
⋄
FIN4802 ASSIGNMENT 01
Semester 1 Assignment 01 – 2026
⋄
Module Code: FIN4802
Module Name: Finance and Investments
Assignment No.: 01
Due Date: 21 May 2026
Semester: Semester 1, 2026
Unique Number: 662810
Submitted in partial fulfilment of the requirements for FIN4802
at the University of South Africa.
,UNISA | FIN4802 Assignment 01 – 2026
Question 1: Currency Hedging – Jones Corp. [10 marks]
Question: Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1
year. The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on Euros
are available, with an exercise price of $1.23 and a premium of $0.04 per unit. Assume the
following money market rates:
Rate United States Eurozone
Deposit Rate 8% 5%
Borrowing Rate 9% 6%
1(a) Money Market Hedge [5 marks]
Question: Determine the dollar cash flows to be received if Jones uses a money market hedge.
(Assume Jones does not have any cash on hand.)
Jones expects to receive Euros (a receivable), so the money market hedge works by borrowing
in Euros today and converting to dollars immediately, then repaying the Euro loan from the
future receivable.
Step 1: Borrow Euros today at the Eurozone borrowing rate (6%).
The amount to borrow is the present value of the 1 million Euro receivable, discounted at the
Euro borrowing rate:
Euro Receivable 1,000,000
Euro Loan = = = 943,396.23 EUR (1)
1 + rborrow, EUR 1.06
Implementation Insight
Borrowing exactly this amount today means that in one year, the loan grows to exactly
EUR 1,000,000 (the receivable), so the two positions cancel perfectly.
Step 2: Convert the borrowed Euros to US dollars at the current spot rate ($1.20/EUR).
USD Proceeds = 943,396.23 × 1.20 = $1,132,075.47 (2)
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, UNISA | FIN4802 Assignment 01 – 2026
Step 3: Invest the USD proceeds in the US at the US deposit rate (8%) for one
year.
USD at maturity = 1,132,075.47 × (1 + 0.08) = 1,132,075.47 × 1.08 = $1,222,641.51 (3)
Step 4: In one year, receive EUR 1,000,000 and repay the Euro loan.
The receivable of EUR 1,000,000 exactly covers the loan repayment. The net dollar cash flow
retained is:
Dollar Cash Flow (Money Market Hedge) = $1,222,641.51 (4)
Key Distinction
Jones does not use the forward rate or any expected future spot rate under a money
market hedge. The outcome is locked in today through borrowing, converting, and
investing – all at current rates.
1(b) Put Option Hedge [5 marks]
Question: Determine the dollar cash flows to be received if Jones uses a put option hedge.
Jones holds a Euro receivable and fears the Euro may depreciate. A put option gives Jones
the right to sell Euros at the exercise price, providing a floor on the exchange rate.
Given information:
• Exercise price: $1.23 per EUR
• Option premium: $0.04 per EUR
• Expected spot rate in 1 year: $1.22 per EUR
• Euro receivable: 1,000,000 EUR
Step 1: Determine the cost of the put options.
Total Premium Cost = 0.04 × 1,000,000 = $40,000 (5)
Step 2: Determine whether to exercise the put option.
Page 2 of 18
College of Economic and Management Sciences
⋄
FIN4802 ASSIGNMENT 01
Semester 1 Assignment 01 – 2026
⋄
Module Code: FIN4802
Module Name: Finance and Investments
Assignment No.: 01
Due Date: 21 May 2026
Semester: Semester 1, 2026
Unique Number: 662810
Submitted in partial fulfilment of the requirements for FIN4802
at the University of South Africa.
,UNISA | FIN4802 Assignment 01 – 2026
Question 1: Currency Hedging – Jones Corp. [10 marks]
Question: Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1
year. The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on Euros
are available, with an exercise price of $1.23 and a premium of $0.04 per unit. Assume the
following money market rates:
Rate United States Eurozone
Deposit Rate 8% 5%
Borrowing Rate 9% 6%
1(a) Money Market Hedge [5 marks]
Question: Determine the dollar cash flows to be received if Jones uses a money market hedge.
(Assume Jones does not have any cash on hand.)
Jones expects to receive Euros (a receivable), so the money market hedge works by borrowing
in Euros today and converting to dollars immediately, then repaying the Euro loan from the
future receivable.
Step 1: Borrow Euros today at the Eurozone borrowing rate (6%).
The amount to borrow is the present value of the 1 million Euro receivable, discounted at the
Euro borrowing rate:
Euro Receivable 1,000,000
Euro Loan = = = 943,396.23 EUR (1)
1 + rborrow, EUR 1.06
Implementation Insight
Borrowing exactly this amount today means that in one year, the loan grows to exactly
EUR 1,000,000 (the receivable), so the two positions cancel perfectly.
Step 2: Convert the borrowed Euros to US dollars at the current spot rate ($1.20/EUR).
USD Proceeds = 943,396.23 × 1.20 = $1,132,075.47 (2)
Page 1 of 18
, UNISA | FIN4802 Assignment 01 – 2026
Step 3: Invest the USD proceeds in the US at the US deposit rate (8%) for one
year.
USD at maturity = 1,132,075.47 × (1 + 0.08) = 1,132,075.47 × 1.08 = $1,222,641.51 (3)
Step 4: In one year, receive EUR 1,000,000 and repay the Euro loan.
The receivable of EUR 1,000,000 exactly covers the loan repayment. The net dollar cash flow
retained is:
Dollar Cash Flow (Money Market Hedge) = $1,222,641.51 (4)
Key Distinction
Jones does not use the forward rate or any expected future spot rate under a money
market hedge. The outcome is locked in today through borrowing, converting, and
investing – all at current rates.
1(b) Put Option Hedge [5 marks]
Question: Determine the dollar cash flows to be received if Jones uses a put option hedge.
Jones holds a Euro receivable and fears the Euro may depreciate. A put option gives Jones
the right to sell Euros at the exercise price, providing a floor on the exchange rate.
Given information:
• Exercise price: $1.23 per EUR
• Option premium: $0.04 per EUR
• Expected spot rate in 1 year: $1.22 per EUR
• Euro receivable: 1,000,000 EUR
Step 1: Determine the cost of the put options.
Total Premium Cost = 0.04 × 1,000,000 = $40,000 (5)
Step 2: Determine whether to exercise the put option.
Page 2 of 18
