Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?

Question

Quizplus · Accepted Answer

To hedge the position, we need to sell Japanese yen forward.

Using the information given, the current spot rate of the yen is $.0089, while the forward rate is $.0095.

Thus, the forward exchange rate is at a premium (i.e., the yen is expected to appreciate).

If we sell Japanese yen forward, we can lock in the exchange rate at the forward rate of $.0095.

Therefore, we will receive:

5,000,000 yen x $.0095/yen = $47,500

in 60 days.

Your Company Expects to Receive 5,000,000 Japanese Yen 60 Days