A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. $$\begin{array} { l l l } \hline \text { Spot exchange rates } & 1 \text {-year Forward Rates } & \text { Contract size } \ \hline \$ 1.20 = € 1.00 & \$ 1.25 = € 1.00 & € 62,500 \ \$ 1.00 = \mathbf { Y 1 0 0 } & \$ 1.00 = \mathbf { Y } 120 & \mathbf { Y 1 } 2,500,000 \ \hline \end{array}$$ The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge his exchange rate risk.Have an estimate of how many contracts of what type.

Question

Quizplus · Accepted Answer

The Japanese importer needs to hedge against the euro appreciating against the yen. By going short in 12 yen forward contracts, the importer locks in the yen amount needed to pay the euro payable. Going long in 16 euro contracts ensures the euro amount is covered.

A Japanese IMPORTER Has a €1,000,000 PAYABLE Due in One