Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.90 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.56 per F$. If Retrojo were to exchange U.S. dollars for the required F$1,900,000.00 Fijian dollars, it would need $ (U.S. dollars). If Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.70 during those 90- days, then Retrojo would need (U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract. T reduce increase RE: 0/2
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.90 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.56 per F$. If Retrojo were to exchange U.S. dollars for the required F$1,900,000.00 Fijian dollars, it would need $ (U.S. dollars). If Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.70 during those 90- days, then Retrojo would need (U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract. T reduce increase RE: 0/2
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.90 million (Fijian dollars, F$) worth of imports from Fiji in 90 days.
Currently, the spot rate for the Fijian dollar is $0.56 per F$.
(U.S. dollars). If
If Retrojo were to exchange U.S. dollars for the required F$1,900,000.00 Fijian dollars, it would need $
Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.70 during those 90-
days, then Retrojo would need $
(U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can
its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract.
reduce
increase
RE: 0/2
step)
Expert Solution
Introduction
The forward contract is used for hedging by locking a specific exchange rate and specific date for settlement. In this case, if the company believes that the currency will appreciate and if the company enters into a forward contract at the spot rate, it can be beneficial.
The exchange rate that is given is direct and hence the amount in USD can be found out directly by multiplying the given rate of F$/USD with amount in F$.
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