Question

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)___.

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.