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. $$\begin{array}{l}
1 \text {-year rates of interest }\
\begin{array} { l l l }
& \text { Borrowing } & \text { lending } \
\hline \text { Dollar } & 4.5 \% & 4.00 \% \
\text { Euro } & 6.00 \% & 5.25 \% \
\text { yen } & 1.00 \% & 0.75 \% \
\hline \text { Spot exchange rates } & 1 \text {-year Forward Rates } \
\hline \$ 1.25 = € 1.00 & \$ 1.2262 = € 1.00 \
\$ 1.00 = \pm 100 & \$ 1.03 = \pm 100 & \
\hline
\end{array}
\end{array}$$

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. $$\begin{array}{l}
1 \text {-year rates of interest }\
\begin{array} { l l l } 
& \text { Borrowing } & \text { lending } \
\hline \text { Dollar } & 4.5 \% & 4.00 \% \
\text { Euro } & 6.00 \% & 5.25 \% \
\text { yen } & 1.00 \% & 0.75 \% \
\hline \text { Spot exchange rates } & 1 \text {-year Forward Rates } \
\hline \$ 1.25 = € 1.00 & \$ 1.2262 = € 1.00 \
\$ 1.00 = \pm 100 & \$ 1.03 = \pm 100 & \
\hline
\end{array}
\end{array}$$

Quizplus · Accepted Answer

Borrow €943,396.22 today, which will grow to €1,000,000 in one year at 6% interest. Convert the borrowed euros to dollars at the spot rate ($1.25/€), then convert dollars to yen at the spot rate (¥100/$). This locks in the current exchange rates and eliminates future exchange rate risk.

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