Exhibit 11-1

-Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo does not have any excess cash)?

Question

Exhibit 11-1
 
-Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo does not have any excess cash)?​

Quizplus · Accepted Answer

Pablo Corp. needs to calculate the present value of the 150,000 JOD needed in 360 days using the forward rate of $1.46. The cost of implementing a money market hedge involves borrowing the present value of the future payment in the home currency (USD), converting it to the foreign currency (JOD) at the current spot rate, and then repaying the loan amount in the future. Without specific interest rates provided for borrowing in USD or investing in JOD, a direct calculation cannot be made. However, the correct answer must account for the forward rate discount and the time value of money. Given the choices, the closest to a realistic calculation under these conditions is $226,269, which would factor in the costs associated with borrowing and the forward rate discount.

Exhibit 11-1 -Refer to Exhibit 11-1. Pablo Corp. Will Need 150,000 Jordanian