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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

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

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

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NigelProfessional · Tutor for 6 years

Answer

So, the value of the payment by forward rate comes out to be \( £ 423,878.48 \).

Explain

## Step 1: Understand the Exchange Mechanism<br />Forward 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. <br /><br />## Step 2: Apply the Given Rates<br />The problem provides us with the rates for converting dollars to pounds at both the spot rate and the 1-month forward rate.<br /><br />## Step 3: Calculate the Required Payment:<br />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. <br /><br />### Formulate the Pounds Calculation:<br />The calculation is \( \frac{600,000}{1.4155} \).
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