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in three months' tim RA? Bank pays compar Company pays bar Company pays ba Bank pays compar

in three months' tim RA? Bank pays compar Company pays bar Company pays ba Bank pays compar

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Highlight F Strikethrough Calculator Scratch Pad Fogtix Co, whose home currency is the dollar, is planning to open a manufacturing facility in three months' time in a foreign country whose currency is the rupee. The current spot exchange rate is 25 rupees per $1. On opening the facility, Fogtix Co will need temporary finance of $2m for a period of six months. The finance director of Fogtix Co is concerned about increasing interest rate volatility and she is considering using a forward rate agreement (FRA) to reduce the interest rate risk of borrowing the required temporary finance. The company's bank has offered a 3-9 FRA at 5.10 -4.60. Additionally, the finance director is considering reducing the effect of interest rate volatility by matching Fogtix Co's future interest-sensitive cash flows. In preparing cash flow forecasts for the manufacturing facility for the first two years of operation, the finance director of Fogtix Co needs to forecast exchange rates. She has gathered the following information on interest rates and inflation rates: Year 1 Year 2 Dollar inflation rates Rupee inflation rates Dollar interest rates Rupee interest rates 3.6% per year 6.0% per year 5.3% per year 7.8% per year 3.8% per year 7.0% per year 6.1% per year 8.1% per year Time Remaining 02:34:44 16 of 34 Close All P Elag for Review If in three months' time Fogtix Co borrows $2m at 4.9% per year, what is the outcome of using the FRA? Bank pays company $3,000 Company pays bank $4,000 Company pays bank $2,000 Bank pays company $2,000
Transcribed Image Text:Highlight F Strikethrough Calculator Scratch Pad Fogtix Co, whose home currency is the dollar, is planning to open a manufacturing facility in three months' time in a foreign country whose currency is the rupee. The current spot exchange rate is 25 rupees per $1. On opening the facility, Fogtix Co will need temporary finance of $2m for a period of six months. The finance director of Fogtix Co is concerned about increasing interest rate volatility and she is considering using a forward rate agreement (FRA) to reduce the interest rate risk of borrowing the required temporary finance. The company's bank has offered a 3-9 FRA at 5.10 -4.60. Additionally, the finance director is considering reducing the effect of interest rate volatility by matching Fogtix Co's future interest-sensitive cash flows. In preparing cash flow forecasts for the manufacturing facility for the first two years of operation, the finance director of Fogtix Co needs to forecast exchange rates. She has gathered the following information on interest rates and inflation rates: Year 1 Year 2 Dollar inflation rates Rupee inflation rates Dollar interest rates Rupee interest rates 3.6% per year 6.0% per year 5.3% per year 7.8% per year 3.8% per year 7.0% per year 6.1% per year 8.1% per year Time Remaining 02:34:44 16 of 34 Close All P Elag for Review If in three months' time Fogtix Co borrows $2m at 4.9% per year, what is the outcome of using the FRA? Bank pays company $3,000 Company pays bank $4,000 Company pays bank $2,000 Bank pays company $2,000
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