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QUESTION 20 Blake Inc., a U.S. MNC, needs to pay EUR1,000,000 in one year. It can earn 2 percent annualized on a German secur

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The company can convert 1 million US dollars to Euros and invest it at 2% per annum. After one year, it will have to pay back 1 million US dollars and it will receive EUR 10,20,000. It will pay EUR 1 million to meet its obligation and convert EUR 20,000 to USD by entering into a Forward Contract (Hedging tool). The no arbitrage forward exchange rate can be computed using Interest rate parity, that is 1 USD = EUR 1.20
Therefore, EUR 20,000 = USD 19,607
Hence,the effective cost is USD 1 million - USD 19,607 = USD 980,392. Hence, the first option is the answer.

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