A U.S. company needs 100,000 euros in 1 year. It could convert dollars to euros and deposit the euros in a bank today. It can earn 5% on the deposit.
Assuming a spot rate today of $1.18, the dollars needed to make the deposit today are:
If the MNC can borrow dollars at an interest rate of 8%, it would borrow the funds needed to make the deposit and at the end of the year it would repay the loan: