International Machinery Company (IMC) is a Swedish multinational manufacturing c

Question

International Machinery Company (IMC) is a Swedish multinational manufacturing company. Currently, IMC's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2,350 and a cash inflow the following year of $3,350. IMC estimates that its risk-adjusted cost of capital is 20%. Currently, 1 U.S. dollar will buy 6.7 Swedish kronas. In addition, 1-year risk-free securities in the United States are yielding 2%, while similar securities in Sweden are yielding 1%.

If the interest parity holds, what is the forward exchange rate of Swedish krona per U.S. dollar? Round your answer to 2 decimal places. Do not round intermediate calculations. Swedish krona per U.S. dollar

Explanation / Answer

forward exchange rate = spot exchange rate*(1+domestic interest rate) / (1+foreign interest rate)

Fwd = 6.7*(1+1%)/(1+2%)

= 6.63 Swedish kronas per USD

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