A Japanese EXPORTER has a €1,000,000 receivable due in one year.
Spot and forward exchange rate data is given in the table:
Spot Rate |
1-year forward rate |
Contract Size |
$1.20 =€1.00 |
$1.25= €1.00 |
€62.500 |
$1.00 =¥100 |
$1.20= €120 |
¥12,500,000 |
The one-year risk free rates are i$ = 4.03%;
i€ = 6.05%; and i¥ = 1%.
Detail a strategy using forward contract that will hedge exchange
rate risk.
Group of answer choices
Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1.
Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to yen at spot, receive ¥116,504,854.
Buy €1m forward using 16 contracts at the forward rate of $1.20 per €1.
I have answered the question below
Please up vote for the same and thanks!!!
Do reach out in the comments for any queries
Answer:
Get Answers For Free
Most questions answered within 1 hours.