Question

(a) Lilith Corporation, a MNC based in New York will need 1 million Brunei Dollars (BND) in 90 days to purchase Brunei imports. It can buy the BND for immediate delivery at spot rate of S(USD/BND) = 1.5000 or it could wait 90 days and then exchange USD for BND at the spot rate existing at that time, but Lilith Corporation will not know what the rate will be.

i. Calculate the USD amount that Lilith Corporation needs to exchange based on the current spot rate.

ii. Assume that Lilith Corporation negotiated a 90-days forward rate of F90 (USD/BND) = 1.5000, calculate the profit / (loss) should the 90-days days spot position equal to S90 (USD/BND) = 1.6700.

iii. Assume that Lilith Corporation negotiated a 90-days forward rate of F90 (USD/BND) = 1.5000, calculate the profit / (loss) should the 90-days spot position equal to S90 (USD/BND) = 1.4300.

(b) Equizuo Corporation and Mithril Corporation has entered into a 5 year currency swap for $2 million. Equizuo Corporation is a US-based MNE and Mithril Corporation is a EURbased MNE. The spot exchange rate is S (€ / $) = 1.25.

Calculate the following:

i. Interest amount that each firm need to serve at the end of the year given that US interest rate is 4.7 percent and EUR interest rate is 5.2 percent.

ii. Given the exchange rate after 1 year is S (€ / $) = 1.27, calculate the amount that Equizuo Corporation and Mithril Corporation need to pay in dollar term.

Answer 1

i

Lilith Corporation needs 1 million Brunei Dollars and the current spot rate is S(USD/BND) = 1.500

As we know that the 1 BND fetches $1.5 So for BND 1000000 we need 1000000/1.5 $ = $ 666,666.66

ii

If the Company negotiates the contract at F90(USD/BND) = $1.5 and the spot rate after 90 days S90 (USD/BND) = 1.67 then the company could get the BND for (1000,000/1.67) =  $ 5,98,802.39 but as they have entered into Futures Contract they will be obliged to pay $666,666.66 So they will bear a loss of (666,666.66 - 598,802.39) = $67,863.61

iii

If the Company negotiates the contract at F90(USD/BND) = $1.5 and the the spot rate after 90 days S90(USD/BND) = 1.43 then the company could get the BND for (1000,000/1.43) = $699,300.69 but as they have entered into Futures Contract they will pay $666,666.66 so in process they will make a profit of ( 699,300.69 - 666,666.66) = $ 32,634.03

I am really sorry I can only answer 1 question at a time