Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.

Question

Quizplus · Accepted Answer

If the U.S. dollar is expected to depreciate against the yen, the Japanese firm would want to hedge in order to lock in the current exchange rate and protect their revenue from any potential loss. In order to do this, they would sell dollars forward, which means they would agree to exchange yen for dollars at a predetermined exchange rate at some point in the future. This would allow them to avoid any potential losses from an unfavorable exchange rate movement.

Assume a Japanese Firm Invoices Exports to the U