Question

You have a ¥40,000,000 payable. The spot rate is $0.0089/¥. The Japanese deposit interest rate is 0.6% and the U.S. borrowing interest rate is 2.5%. Calculate the dollar amount of a money market hedge.

Answer 1

=> To calculate the dollar amount of money market hedge, First we have to find the Present value of Japanese yen.

=> The formula for calculating present value is

, F.V is future value, r is interest rate and t is time period

=> 40000000/(1+0.006) = ¥ 39761431.41

=> Now convert it into US dollars using the spot rate

* ¥ 39761431.41*0.0089 = $ 353876.74

=> Now find the find the future value of that amount using the US interest rate = $ 353876.74*(1+0.025)

   = $ 362723.66

=> It means that one have to borrow $353876.75 and pay an amount of $ 362723.66 at the maturity to hedge this.