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Capital Budgeting with Hedging

Baxter Co. Considers a project with Thailand's Government. If it accepts the project, it will definitely receive one lump sum cash flow of 10 million Thai baht in five years. The spot rate of the Thai baht is presently $0.03. The annualized interest rate for a 5-year period is 4 percent in the United States and 17 percent in Thailand. Interest rate parity exists. Baxter plans to hedge its cash flows with a forward contract. What is the dollar amount of cash flows that Baxter will receive in five years if it accepts this project?

Solution Summary

This solution calculates and explains the dollar amount of cash flows that a firm will receive in a certain time given a spot rate, annualized interest rate and rate parity.