Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ____ $____.

Question

Quizplus · Accepted Answer

Johnson will be paid $20,000. This is because the value of the baht increased from $.02 to $.022. The difference ($.002) on 10 million baht equals $20,000. Since the baht appreciated, the bank pays Johnson the difference.