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18 September, 18:39

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

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  1. 18 September, 20:10
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    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
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