Question

2. Suppose on July 1st, an American merchant expects ¥ 630 million revenue from Japan at the end of July. On July 1st, the spot exchange rate is $1 = ¥ 110, the 30-day forward exchange rate is $1 = ¥ 120, and the 60-day forward exchange rate is $1 = ¥ 115. This merchant predicts that by the end of July, the spot exchange rate will be $1 = ¥ 113 and the 30-day forward exchange rate will be $1 = ¥ 123. He also knows that during August, the U.S. will have a monthly nominal interest rate at 5% and inflation rate at 3%, while Japan will have a monthly nominal interest rate at 4% and inflation rate at 1%. Please provide the amount of USD the merchant can get by the end of August through the following options (calculation formula is required):

Q2.1: He converts the ¥1 million to $ right away at the end of July.

Answer2.1:

Q2.2: He hedges the ¥ 1 million sales through the 30-day forward contract on July 1st.

Answer2.2:

Q2.3: He hedges the ¥ 1 million sales through the 60-day forward contract on July 1st.

Answer3.2:

Q2.4: He hedges the ¥ 1 million sales through the 30-day forward contract on July 31st.

Answer 2.4:

Answer 1

The subquestions 2.1, 2.2, 2.3 and 2.4 only asks to convert ¥1,000,000 into Dollars, even though in the main question the receipt is ¥630 million.

The formula for calculation is = Receipt in ¥ * rate