Assume Scarlett Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9 percent. At the time the loan is extended, the spot rate of the kwacha is $.00060. If the spot rate of the kwacha in one year is $.00056, the dollar amount initially invested in Zambia is $____, and $____ are paid out after one year.

Question

Quizplus · Accepted Answer

The initial dollar amount invested is 2,500,000 ZMK * $.00060 = $1,500. After one year, the investment grows to 2,500,000 ZMK * 1.09 = 2,725,000 ZMK. Converting this back to dollars at the new spot rate of $.00056 gives 2,725,000 ZMK * $.00056 = $1,526.