At what forward rate would interest rate parity hold given the interest rates?
Magnetronics, Inc., a U.S. company, owes its Taiwanese supplier NT$205 million in three months. The company wishes to hedge its NT$ payable. The current spot rate is NT$1 = U.S.$0.03987, and the three-month forward rate is NT$1 = U.S.$0.04051. Magnetronics can also borrow or lend U.S. dollars at an annualized interest rate of 12% and Taiwanese dollars at an annualized interest rate of 8%.
a. What is the U.S. dollar accounting entry for this payable?
b. What is the minimum U.S. dollar cost that Magnetronics can lock in for this payable? Describe the procedure it would use to get this price.
c. At what forward rate would interest rate parity hold given the interest rates?