IRP and Forecasting New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. interest rate is 4 percent, regardless of the debt maturity. The annualized Australian dollar interest rate is 12 percent regardless of the debt maturity. New York Co. plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists. Determine the amount of U.S. dollars that New York Co. will need in two years to make its payment.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 9, Problem 26QA
Textbook Problem

IRP and Forecasting New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. interest rate is 4 percent, regardless of the debt maturity. The annualized Australian dollar interest rate is 12 percent regardless of the debt maturity. New York Co. plans to hedge its exposure with a forward contract that it will arrange today. Assume that interest rate parity exists. Determine the amount of U.S. dollars that New York Co. will need in two years to make its payment.

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