Question

As an American importer, I need to hedge a 5.1 million Yen bill due in 3 months

                        NOW                          In 3 months

Spot rate         0.0094-95 $/Y             .0150-51 $/Y

Forward rate    0.0100-01 $/Y            

Futures rate     0.0096                         0.0148 $/Y

USE CONTRACT SIZE 1,000,000

Please hedge with forwads, futures, and don’t hedge it and rank them.(4 answers)

Answer 1

1. Payment as per Forward Contract = Payment * Forward Ask Rate

Payment as per Forward Contract = Yen 5100000 * 0.0101

Payment as per Forward Contract = $51510

2. Payment as per Futures Contract = Actual Cash Payment as per Spot Rate - Profit from Futures Contract

Payment as per Futures Contract = 5100000 * 0.0151 - (5100000 * (0.0148-0.0096))

Payment as per Futures Contract = 77010 - 26520

Payment as per Futures Contract = $50490

3. Dont hedge it = Cash Flow = Actual Cash Payment as per Spot Rate

Dont hedge it = Cash Flow = 5100000 * 0.0151

Dont hedge it = Cash Flow = 77010

4. Ranking - Lower Cash Flow - Better

Forwards = Rank 2

Futures = Rank 1

Dont Hedge It = Rank 3

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