California Co. will need 1 million Polish zloty in 2 years to purchase imports. Assume interest rate parity holds. Assume that the spot rate of the Polish zloty is $.30. The 2-year annualized interest rate in the United States is 5 percent, and the 2-year annualized interest rate in Poland is 11 percent. If California Co. uses a forward contract to hedge its payables, how many dollars will it need in 2 years?
The 2-year forward premium is 1.1025/1.2321 – 1 = -.10518
The 2-year forward rate is $.30 × (1 – .10518) = $.26844
The amount of dollars needed is $.26844 × 1,000,000 zloty = $268,440.