A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is given in the table: The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%. Detail a strategy using forward contract that will hedge exchange rate risk. A)Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to yen at spot, receive ¥116,504,854. B)Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000 forward using 11.52 contracts, at the forward rate of $1.00 = ¥120. C)Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120. D)None of the above

Question

Quizplus · Accepted Answer

The Answer of A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is given in the table: The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%. Detail a strategy using forward contract that will hedge exchange rate risk. A)Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to yen at spot, receive ¥116,504,854. B)Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000 forward using 11.52 contracts, at the forward rate of $1.00 = ¥120. C)Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120. D)None of the above

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