Question
Fordis Plc. has to pay an American supplier 600,000 in one month's time and the forward rate and spot rate are 1.4155=￡1 and 1.4185=￡1 respectively. What is the value of the payment if the forward rate was used? Select the correct answer from the drop down list ￡425,965.36 ￡423,878.48 ￡432,174.23 ￡422,982.02
Answer
4.6
(231 Votes)
Nigel
Professional · Tutor for 6 years
Answer
So, the value of the payment by forward rate comes out to be
.
Explanation
## Step 1: Understand the Exchange MechanismForward exchange rate is the exchange rate at which a party is willing to enter into a contract to exchange currencies either at a future date (i.e., forward contract) or at a certain date (i.e., spot contract). In this problem, Fordis Plc. uses the forward rate to calculate the value that is required to pay to an American Supplier. ## Step 2: Apply the Given RatesThe problem provides us with the rates for converting dollars to pounds at both the spot rate and the 1-month forward rate.## Step 3: Calculate the Required Payment:To find the value of the payment in pounds, we need to divide the amount (in American dollars) by the forward rate, as the transaction will be performed using this rate. ### Formulate the Pounds Calculation:The calculation is
.