Transcorp has made a purchase of goods from a foreign firm that will require payment of FC380,000 six months later. Transcorp wishes to make definite the amount of dollars it will need to pay the FC380,000 on the due date. The foreign firm is domiciled in a country whose currency has been rising in relation to the dollar in recent years. The tax rate in both countries is 40%. Transcorp plans to borrow an amount in dollars from a U.S. bank to immediately exchange into FCs to buy securities in the foreign country, which with interest, will equal FC380,000 six months later. The interest rate that will be paid in the United States is 12%, the interest rate that will be earned on the foreign securities is 8%. When at the end of six months Transcorp is required to make the payment in FC, it will use the funds from the maturing foreign securities in FCs to meet its obligation in FCs. At the same time it will pay off the loan plus interest in the United States in dollars.
(a) What is the net amount that Transcorp pays to meet the obligation of FC380,000 in six months if the current spot rate is FC2.00 to the dollar?
(b) How much more is this than the amount Transcorp would have paid if payment had been made immediately instead of six months later?
(c) At what forward rate of exchange would the amount paid by Transcorp have been the same as what it would have paid using the capital markets? Would Transcorp have taken the long position in the forward FC or have sold the FC forward short to hedge its position?
(d) If a speculator took the opposite position from Transcorp in the forward market for FCs, would the speculator be long or short? If the speculator received a risk premium for holding this position, would this place the current forward rate in FCs above or below the expected future spot rate in FCs per dollar?