Explain in detail and also solve this example. And also explain offsetting effect. Jackson, Inc., an MNC based in Wyoming, determines as of April 1 that it will need 100 million Chilean pesos to purchase supplies on July 1. It can negotiate an NDF with a local bank as fol- lows. The NDF will specify the currency (Chilean peso), the settlement date (90 days from now),and a so-called reference rate, which identifies the type of exchange rate that will be marked to market at the settlement. Specifically, the NDF will contain the following information: Buy 100 million Chilean pesos. Settlement date: July 1. Reference index: Chilean peso's closing exchange rate (in dollars) quoted by Chile's central bank in 90 days. Assume that the Chilean peso (which is the reference index) is currently valued at $.0020, so the dollar amount of the position is $200,000 at the time of the agreement. At the time of the settlement date (July 1), the value of the reference index is determined, and a payment is made between the two parties to settle the NDF. For example, if the peso value increases to $.0023 by July 1, the value of the position specified in the NDF will be $230,000 ($.0023 100 million pesos). Since the value of Jackson's NDF position is $30,000 higher than when the agreement was created, Jackson will receive a payment of $30,000 from the bank. Recall that Jackson needs 100 million pesos to buy imports. Since the peso's spot rate rose from April 1 to July 1, Jackson will need to pay $30,000 more for the imports than if it had paid for them on April 1. At the same time, however, Jackson will have received a payment of $30,000 due to its NDF. Thus, the NDF hedged the exchange rate risk. If the Chilean peso had depreciated to $.0018 instead of rising, Jackson's position in its NDF would have been valued at $180,000 (100 million pesos $.0018) at the settlement date, which is $20,000 less than the value when the agreement was created. Therefore, Jackson would have owed the bank $20,000 at that time. However, the decline in the spot rate of the peso means that Jackson would pay $20,000 less for the imports than if it had paid for them on April 1. Thus, an offsetting effect would also occur in this example

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A NonDeliverable Forward NDF is a financial instrument used to hedge against exchange rate risk in c... View the full answer