Consider a small multinational company, Carrat Inc., which specializes in the production of precision tools. The company is based out of Warsaw, Poland and has a major client in Russia. Annually, Carrat sells 1.5 billion RBL (Russian Rubles) of tools to its client. Currently, the exchange rate is 18.91 RBL/PLZ. The domestic interest rate in Russia is 8.50% and in Poland it is 3%.

1. What is the one-year forward rate for the RBL/PLZ based on this information? What does this mean for Carrat?
2. Based on extensive research, Carrat anticipates that the Russian Ruble will depreciate within the next year. Should it enter into the forward contract? Why or why not? Does it have other alternatives?
3. Why is exchange rate risk important for multinational corporations? Discuss the importance of using derivatives to manage exchange rate risk, as well as the drawbacks for smaller firms.

Answer rating: 100% (QA)

To calculate the oneyear forward rate for RBLPLZ we can use the formula Forward Rate Spot Rate x 1 F... View the full answer