Suppose that Sears owes 1 million yen to a Japanese electronics manufacturer in 3 months.It could hedge against the risk of a depreciation of the dollar against the yen by contracting to purchase 1 million yen in the forward market,at today's forward rate,for delivery in 3 months.

Question

Quizplus · Accepted Answer

By contracting to purchase 1 million yen in the forward market, Sears can lock in the exchange rate and protect itself against the risk of a depreciation of the dollar against the yen. This is a common hedging strategy used by companies to minimize currency risk.

Suppose That Sears Owes 1 Million Yen to a Japanese