Question

A U.S. MNC will receive 1 million Indian rupees (INR) in one year. The current spot rate is INR 75 /USD and the one year forward rate is INR 320/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

Answer 1

Answer:

3,125 USD

Explanation:

A forward contact is an agreement between two parties which make an obligation on buyer to purchase something at a decided rate in future and on seller to sale.

Forward rate means that means that INR will be converted to USD at rate of INR320 /USD in future, whatever the spot exchange rate will be at that time.  

Amount to be received by US MNC in 1 year = INR 1,000,000

Current Spot rate = INR 75 per USD

One year forward rate = INR 320 per USD

Dollar amount the firm will receive using Forward Hedge = Amount to be received / One year forward rate = INR 1,000,000 /  INR 320 per USD = 3,125 USD