Question

3. Trading in foreign exchange What are spot rates and forward rates? Purple Panda Importers, a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for ¥689 million, but the Japanese firm has 60 days before it must make the payment to Purple Panda Importers The spot exchange rate is ¥128.75 per dollar, and the 60-day forward rate is ¥133.45 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar? The yen is trading at a discount in the forward market. In the forward market, the yen is trading at a premium. If the customer pays Purple Panda Importers the ¥689 million today, how much will Purple Panda Importers receive in dollars? $4.55 million $5.35 million $5.89 million $5.08 million

Assuming that the forward market is correct and the spot exchange rate in 60 days will equal the 60-day forward exchange rate today, Purple Panda Importers would get more dollars if the Japanese firm paid off its account In 60 days/Today .

Answer 1

Question 1)

Spot exchange rate = Y128.75/$

Forward rate = Y133.45/$

The Yen is selling/trading at a discount in the forward market as for 1$, a person will get more Yen in future. Hence the answer is option 2).

Question 2)

Value = Y689 million

Spot exchange rate = Y128.75/$

Purple Panda Importers will receive = 689/128.75 = $5.35 million.

Hence the answer is option b) $5.35 million

Question 3)

The Purple Panda Importers would get more dollars if the Japanese firm paid off its account Today.

Value today = 689/128.75 = $5.35 million.

value after 60 days = 689/133.45 = $5.16 million

Hence Purple Panda Importers would get more dollars Today.

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