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3. Trading in foreign exchange What are spot rates and forward rates? Purple Whale Foodstuffs Inc.,...

3. Trading in foreign exchange

What are spot rates and forward rates?

Purple Whale Foodstuffs Inc., a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for ¥675 million, but the Japanese firm has 60 days before it must make the payment to Purple Whale Foodstuffs Inc. The spot exchange rate is ¥129.20 per dollar, and the 60-day forward rate is ¥134.56 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar?

In the forward market, the yen is trading at a premium.

The yen is trading at a discount in the forward market.

If the customer pays Purple Whale Foodstuffs Inc. the ¥675 million today, how much will Purple Whale Foodstuffs Inc. receive in dollars?

$5.22 million

$5.48 million

$4.44 million

$6.00 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 Whale Foodstuffs Inc. would get more dollars if the Japanese firm paid off its account ___(in 60 days/today)___.

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Homework Answers

Answer #1

What are spot rates and forward rates?

Spot Rate : For any contract / assets current prevailing market price is the spot rate.

Forward Rate : Forward rate is future price of same contract/assets after a certain date/time.

Yen Spot Rate = ¥129.20 per dollar

Yen Forward Rate =  ¥134.56 per dollar

Since Forward Rate is higher than the Spot rate it is selling in premium in forward market.

Ans : In the forward market, the yen is trading at a premium.

customer pays Purple Whale Foodstuffs Inc. the ¥675 million today

Equivalent Dollar Amount = Amount / Spot Yen /Dollar Rate = 675 / 129.20 = 5.22 million dollar

Ans : Purple Whale Foodstuffs Inc. receive in dollars $5.22 million.

Since Yen trading in Premium so,

urple Whale Foodstuffs Inc. would get more dollars if the Japanese firm paid off its account Today.

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