XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.Which of the following is not part of a money market hedge?
A)Buy the ¥750 million at the forward exchange rate.
B)Find the present value of ¥750 million at the Japanese interest rate.
C)Buy that much yen at the spot exchange rate.
D)Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation.

Question

Quizplus · Accepted Answer

Option A, which involves buying yen at the forward exchange rate, is not part of a money market hedge. The other options (B, C, and D) are all viable money market hedge strategies. Option B involves finding the present value of the yen obligation at the Japanese interest rate, which allows the US company to invest in short-term Japanese securities with the same maturity as the obligation. Option C involves buying yen at the spot exchange rate, which allows the US company to immediately pay off the yen obligation. Option D involves investing in risk-free Japanese securities with the same maturity as the obligation, which generates cash flows in yen that can be used to pay off the obligation when it matures.

XYZ Corporation,located in the United States,has an Accounts Payable Obligation