A Sri Lankan MNC that is an importer has a $3,750,000 payable due in one year. Spot exchange rates 1-year Forward Rates Contract size $ 1.00 Rs. 100 $ 1.00 = Rs. 120 Rs. 12,500,000 What is a strategy that will hedge this Sri Lankan firm's exchange rate risk?

A Sri Lankan MNC that is an importer has a $3,750,000 payable due in one year. Spot exchange rates 1-year Forward Rates Contract size $ 1.00 Rs. 100 $ 1.00 = Rs. 120 Rs. 12,500,000 What is a strategy that will hedge this Sri Lankan firm's exchange rate risk?

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter31: Open-Economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 4PA

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

A Sri Lankan MNC that is an importer has a $3,750,000 payable due in one year.
Spot exchange rates
1-year Forward Rates
$ 1.00
Rs. 100
Contract size
$ 1.00 = Rs. 120 Rs. 12,500,000
What is a strategy that will hedge this Sri Lankan firm's exchange rate risk?
A. Go short in 36 rupee forward contracts.
B. Go long in 36 rupee forward contracts.
C. Go short in 30 rupee forward contracts.
D. Go long in 30 rupee forward contracts.
E. None of the options

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