Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

Question

​Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

Quizplus · Accepted Answer

Thornton needs to invest rupees in its Nepalese subsidiary and would like the subsidiary to repay the rupees in a year. This indicates that Thornton is exposed to currency risk as the value of rupees can fluctuate over time. To hedge this risk, Thornton can engage in a swap transaction where it converts dollars to rupees today at the prevailing spot rate and then converts the rupees back to dollars in one year at today's forward rate. This way, Thornton can lock in the exchange rate and mitigate its currency risk. Therefore, the correct choice is to convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate, option C.

​Thornton, Inc

Thornton, Inc