California Co. will need 1 million Polish zloty in 2 years to purchase imports. Assume interest rate parity holds. Assume that the spot rate of the Polish zloty is $.30. The 2-year annualized interest rate in the United States is 5 percent, and the 2-year annualized interest rate in Poland is 11 percent. If California Co. uses a forward contract to hedge its payables, how many dollars will it need in 2 years?

California Co. will need 1 million Polish zloty in 2 years to purchase imports. Assume interest rate parity holds. Assume that the spot rate of the Polish zloty is $.30. The 2-year annualized interest rate in the United States is 5 percent, and the 2-year annualized interest rate in Poland is 11 percent. If California Co. uses a forward contract to hedge its payables, how many dollars will it need in 2 years?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

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a) California Co. will need 1 million Polish zloty in 2 years to purchase imports. Assume
interest rate parity holds. Assume that the spot rate of the Polish zloty is $.30. The 2-year
annualized interest rate in the United States is 5 percent, and the 2-year annualized
interest rate in Poland is 11 percent. If California Co. uses a forward contract to hedge its
payables, how many dollars will it need in 2 years?
b) Compare and contrast the three theories (PPP, IFE and IRP)? Criticallyanalyze the
limitation of these theories.

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