The spot exchange rate for the Thai bhat is 30.000 bhat to the dollar or .00333 dollar to the bhat. For capital budgeting purposes, Ramo Corp needs to estimate the exchange rate 5 years from now. The U.S. interest rate is 2%; the interest rate in Thailand is 6%. The estimated 5 year forward rate is

Question

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The estimated 5-year forward rate can be calculated using the interest rate parity formula, which suggests that the forward rate is determined by the spot rate adjusted for the interest rate differential between the two countries. Given the U.S. interest rate of 2% and the Thai interest rate of 6%, and the current spot rate of 30.000 bhat to the dollar, the forward rate favors the currency of the country with the higher interest rate (Thailand) depreciating. The calculation is as follows: Forward Rate = Spot Rate * (1 + foreign interest rate) / (1 + domestic interest rate) = 30 * (1 + 0.06) / (1 + 0.02) = 30 * 1.06 / 1.02 ≈ 31.18, which is not an option provided, indicating a mistake in my calculation based on the options given. The correct approach should involve understanding that the forward rate reflects expectations of currency movements due to the interest rate differential, and without the exact formula calculation provided in the options, the principle suggests that the Thai bhat will depreciate against the dollar, making B the closest choice based on expected depreciation direction. However, my initial calculation was incorrect, and without the precise calculation aligning with the provided options, the correct answer should be chosen based on the principle of interest rate parity and the expected direction of currency movement, which suggests the Thai bhat would depreciate, but none of the calculations directly match the options given, indicating a misunderstanding in the application of the formula.

The Spot Exchange Rate for the Thai Bhat Is 30