Question

Oracle Corporation (based in the U.S.)  just entered into a five-year contract to provide software services to Sony of Japan. Oracle will receive yen-denominated annual payments from Sony over the next five years. Oracle can reduce its operating exposure by

a.	Buying futures contracts on the Japanese yen
	b.	Remaining unhedged
	c.	Buying yen-denominated stocks
	d.	Taking out yen-denominated loans (Borrowing Japanese yen)
	e.	Buying yen call options

Answer 1

Option D is correct. Taking out Yen dominated Loan.  

Taking out Loan in Yen to hedge Annual Payments is called Money Market hedging.

This is done as follows : -

• Borrow foreign currency which is equivalent to the present value of what you will receive in foreign currency after certain period of time.
• Convert the Foreign Currency at current Spot Rate.
• Invest the Domestic currency now and earn interest
• on specified day, receive the payment from vendor and pay the loan.

This Loan amount will be equal to the amount you are going to receive from vendor because you borrowed the present value of this amount. The whole transaction is hedged,