Question

QUESTION 1 A U.S. MNC will receive 1 million Indian rupees (INR) in one year. The current spot rate is INR75 /USD and the one year forward rate is INR320/USD. The annual interest rate is 5 percent in India and 0 percent in the United States. The dollar amount the firm will receive using the forward hedge is USD 75,000,000 USD 13,333 USD 3,125. None of the answers is correct.

Answer 1

Ques-1).

US MNC will receive amount in 1 year = INR 1 million

Current Spot rate= INR 75/USD

One year forward rate = INR 320/USD

Dollar amount the firm will receive using Forward Hedge = Amount to be received/One year forward rate

= INR 1 million/INR320 per $

= $ 3125

Hence, Dollar will be received is $ 3125. Hence Option c

Ques-2).

Boeing Corporation to receive EUR 20 million in one year

Spot rate = USD1.10/EUR

Forward rate = USD1/EUR

- Proceeds Boeing will receive using Forward Hedge:

= EUR 20 million *USD 1/EUR

= $ 20 million

- Proceeds to be received using Money market hedge:

First, we will calculate the forward rate using Interest rate Parity,

Forwardrate (1 + Interest rate Domestic) = - *(1 + Interestr ate Foregin) Spotrate

Forwardrate (1 + 0.02) = - *(1 +0.04) 1.10

Forward rate = $ 1.0788/EUR

So, proceeds in one year using Money market hedge Forward rate = EUR 20 million *USD 1.0788/EUR

= $ 21.576 million

Boeing corporation should use Money market hedge as the proceeds as per money market hedge are higher.

hence, Option A

Ques- 3)

Spot Rate is $ 1.0000 - $ 1.0005 per Euro

3 month Forward points are 5 and 15

3-month Forward Rate:

Bid rate: Forward Point = Forward rare - Spot Rate

0.0005 = Forward rate - 1.0000

Forward rate = $ 1.0005

Ask rate: Forward Point = Forward rare - Spot Rate

0.0015 = Forward rate - 1.0005

Forward rate = $ 1.0020

So, 3-month Forward Rate = $ 1.0005 - $ 1.0020 per Euro

Hence, Option C