Whohauser is a U.S.-based forest products firm. In June Whohauser delivers a shipment of raw lumber to Japan. The ¥55,000,000 receivable is due in 180 days. The firm's foreign exchange advisors believe the yen will be at about ¥115/$ then. The current spot rate is ¥110/$. Whohauser has received a 180 day forward quote of ¥108/$. If the company locks in the forward quote and the exchange rate goes to ¥115 as expected, how much will the firm receive in dollars in 180 days? Is this cash flow risky or known with certainty today? Is the hedging desirable?
| Calculate amount of dollar received by company if it enters into forward contract | |||||||||
| Amount of dollar received | Receivable due/Exchange rate | ||||||||
| Amount of dollar received | 55000000/108 | ||||||||
| Amount of dollar received | $509,259.26 | ||||||||
| This cash flow is not risky and company would receive $509,259.26 in certainty if entered into forward contract | |||||||||
| Calculate amount of dollar received by company if it does not enters into forward contract | |||||||||
| Amount of dollar received | Receivable due/Exchange rate | ||||||||
| Amount of dollar received | 55000000/115 | ||||||||
| Amount of dollar received | $478,260.87 | ||||||||
| The amount of dollar received would be lower by $30,998.39 ($509,259.26-$478,260.87) if company does not enter into forward contract | |||||||||
| Thus, in this case hedging is desirable | |||||||||
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