Question

C1. (b) You are a Manager of an international business firm in Australia. Your firm has

exported some goods in Japan, the export earning ¥1,000,000 is receivable by the next 3

months. Current exchange rate is $1 = ¥120. You expect that the Japanese Yen may

appreciate to $1 = ¥100 by the next 3 months.

Required:

(i) Explain the implication(s) to your business due to the expected appreciation of Yen.

                                                                                                                        

(ii) Except buying forward and using swaps, explain the collection of your export receivable

strategy that you will take due to the expected change in the exchange rate.

Answer 1

1.Here the Australian firm has ¥ 10, 00,000 receivable in 3 months. It expect that the Japanese Yen may appreciate to $1 = ¥100 by the next 3 months. Which means $ depreciates which will result a profit to the Australian firm.

Profit = (¥ 10, 00,000/120)- (¥10,00,000/100)

Profit      = $ 1667

2. Except buying forward and using swaps, the firm can use a money market hedging strategy. Now the firm can invest the present value of ¥ receivable after 3month by borrowing $ from the domestic market. Through this the firm can hedge the loss.