A Japanese importer has a $1,250,000 payable due in one year. $$\begin{array} { l c c }
\text { Bpot excharge rates } & \text { 1-year Forward Rates } & \text { Contract size } \
\$ 1.00 = ¥100 & \$ 1.00 = ¥ 120 & ¥ 12,500,000
\end{array}$$ Detail a strategy using forward contracts that will hedge his exchange rate risk.
A)Go short in 12 yen forward contracts.
B)Go long in 12 yen forward contracts.
C)Go short in 16 yen forward contracts.
D)none of the options

Question

A Japanese importer has a $1,250,000 payable due in one year. $$\begin{array} { l c c } 
\text { Bpot excharge rates } & \text { 1-year Forward Rates } & \text { Contract size } \
\$ 1.00 = ¥100 & \$ 1.00 = ¥ 120 & ¥ 12,500,000
\end{array}$$ Detail a strategy using forward contracts that will hedge his exchange rate risk.
A)Go short in 12 yen forward contracts.
B)Go long in 12 yen forward contracts.
C)Go short in 16 yen forward contracts.
D)none of the options

Quizplus · Accepted Answer

The Japanese importer should go short in 12 yen forward contracts to lock in the exchange rate of ¥120 per $1, thereby hedging against the risk of the yen depreciating against the dollar.

A Japanese Importer Has a $1,250,000 Payable Due in One