You are a financial manager with JCN,Co.and you have used a forward contract to hedge a yen 100,000,000 payment the company expects to receive in 90 days.Your contract calls for you to deliver yen at 109.75 yen per U.S.dollar.Suppose the spot rate at that time is 111.25 yen per U.S.dollar.Did you gain or lose on the hedge? How much?

Question

Quizplus · Accepted Answer

To calculate the gain or loss on the hedge, we need to compare the forward rate (109.75 yen per U.S. dollar) with the spot rate (111.25 yen per U.S. dollar) at the time of the payment. Since the spot rate is higher than the forward rate, the company would have lost money if they did not hedge. The gain from the hedge can be calculated as follows:
100,000,000 yen / 109.75 yen per U.S. dollar = $910,614.21
100,000,000 yen / 111.25 yen per U.S. dollar = $898,328.88
Gain on hedge = $910,614.21 - $898,328.88 = $12,285.33
Therefore, the answer is C.

You Are a Financial Manager with JCN,Co