A Japanese exporter has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk. $$\begin{array}{l}
1 \text {-year rates of interest }\
\begin{array} { l r r }
& \text { Borrowing } & \text { Lending } \
\text { Dollar } & 4.5 \% & 4.00 \% \
\text { Euro } & 6.009 & 5.25 \% \
\text { Yen } & 1.00 \% & 0.75 \%
\end{array}
\end{array}$$

$\begin{array}{lrl}
\text { Spot exchange rates } & \text { 1-year Forward Rates } \
\$ 1.25=€ 1.0 C & \$ 1.2262=€ 1.00 \
\$ 1.00=¥ 10 C & \$ 1.03= ¥ 100
\end{array}$
A)Borrow €970,873.79 today.Convert the euro to dollars at the spot exchange rate,receive $1,165,048.54.Convert these dollars to yen at the spot rate,receive ¥.
B)Borrow €943,396.22 today.Convert the euro to dollars at the spot exchange rate,convert these dollars to yen at the spot rate,receive ¥117,924,528.30.
C)Lend €943,396.22 today.Convert the euro to dollars at the spot exchange rate,convert these dollars to yen at the spot rate.
D)Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25 percent.

Question

A Japanese exporter has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk. $$\begin{array}{l}
1 \text {-year rates of interest }\
\begin{array} { l r r } 
& \text { Borrowing } & \text { Lending } \
\text { Dollar } & 4.5 \% & 4.00 \% \
\text { Euro } & 6.009 & 5.25 \% \
\text { Yen } & 1.00 \% & 0.75 \%
\end{array}
\end{array}$$

$\begin{array}{lrl}
\text { Spot exchange rates } & \text { 1-year Forward Rates } \
\$ 1.25=€ 1.0 C & \$ 1.2262=€ 1.00 \
\$ 1.00=¥ 10 C & \$ 1.03= ¥ 100
\end{array}$
A)Borrow €970,873.79 today.Convert the euro to dollars at the spot exchange rate,receive $1,165,048.54.Convert these dollars to yen at the spot rate,receive ¥.
B)Borrow €943,396.22 today.Convert the euro to dollars at the spot exchange rate,convert these dollars to yen at the spot rate,receive ¥117,924,528.30.
C)Lend €943,396.22 today.Convert the euro to dollars at the spot exchange rate,convert these dollars to yen at the spot rate.
D)Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25 percent.

Quizplus · Accepted Answer

To hedge against exchange rate risk, the Japanese exporter needs to lock in the current value of the €1,000,000 receivable in yen. This involves borrowing the present value of the receivable in euros, converting it to dollars, and then to yen. The correct present value of the €1,000,000 receivable, considering the euro lending rate of 5.25%, is €943,396.22. This amount is then converted to dollars at the spot rate of $1.25/€, and subsequently to yen at the spot rate of ¥100/$, resulting in ¥117,924,528.30. This strategy ensures that the exchange rate risk is mitigated by locking in the yen value of the future euro receivable.

A Japanese Exporter Has a €1,000,000 Receivable Due in One