A US importer needs to pay 1875000 BDT in 90 days to a Bangladeshi exporter. The US importer is expecting that USD (US Dollars) is going to depreciate from its present level of $1=86.50 BDT to $1=84.75 BDT in 90 days. As a result, the US importer enters into a Non Deliverable Forward (NDF) contract with a bank and fixes $1=85.40 BDT where he will be able to buy BDT at this rate. If the spot rate of USD to BDT depreciates by 1% after 90 days, explain the mechanism of how this NDF contract will work for this US importer in this scenario. (Show all the calculations and steps where necessary) (Word Limit: 150 Words)

Data Given:

An US importer needs to pay 1875000 BDT to a Bangladeshi exporter. But he is expecting that the exchange price may be drop from $1=86.50 BDT to $1=84.75,

Solution:

This will make loss to the importer since the dollar value has been depreciated , So he is entering into an Non Deliverable Forward which means the underlying assets price will not be transferred while making the contract, only the profit and loss will be exchanged between the parties.

The forward price is $1=85.40 BDT and the price has been dropped 1% that means the exchange rate down from 96.5 BDT to 84.546 BDT

So if the dollar and BDT exchange rate is 1$= 86.50, he has to pay $ 21,676.300, If the price drop to 85.40   , then he has to pay $22177.27, But due to the NDF he can need pay only $21955.50, Which saved profit of =$22177.27-$21955.50=$221.77