Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.70 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.73 per F$.
If Retrojo were to exchange U.S. dollars for the required F$1,700,000.00 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 $0.86 during those 90-days, then Retrojo would need ___________(U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can ________(increase OR reduce) its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract.
| Amount of US dollar needed immediately | 1700000*0.73 | ||||||||
| Amount of US dollar needed immediately | $1,241,000 | ||||||||
| Amount of US dollar needed after 90 days | 1700000*0.86 | ||||||||
| Amount of US dollar needed after 90 days | $1,462,000 | ||||||||
| The amount of US dollar needed after 90 days would be higher. | |||||||||
| If Retrojo expects that Fijian dollar would appreciate then it can reduce its exposure to changes in foreign exchange rate by entering into forward contract | |||||||||
| Answers: | |||||||||
| 1st Blank - $1,241,000 | |||||||||
| 2nd Blank - $1,462,000 | |||||||||
| 3rd Blank - Reduce | |||||||||
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