Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It

Question

Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht’s closing exchange rate (in $) quoted by Thailand’s central bank in 90 days. The baht’s spot rate today is $.02. If the rate quoted by Thailand’s central bank on August 1 is $.022, Johnson will ________ $__________.
A) pay; 20,000
B) be paid; 20,000
C) pay; 2,000
D) be paid; 2,000
E) none of the above

Explanation / Answer

Contract is non-deliverable, hence, it will be settled by difference in spot rates on May 1 and August 1. Exchange rate has gone up (appreciated) by 0.022 - 0.020 = 0.002 $/Thai baht. So, Johnson will be benefitted. They will be paid an amount of 10 m baht*0.002 $/baht = 20000 ($) Therefore, ANSWER is OPTION B : be paid ; 20000

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