Question

Hakuna matata Inc. currently does not have excess cash on hand and will pay 22,000,000 Japanese...

Hakuna matata Inc. currently does not have excess cash on hand and will pay 22,000,000 Japanese yen (JPY) in a year. The spot rate for the Japanese yen is USD 0.0112 and the 1-year forward rate for the yen is USD 0.0125. The investing and borrowing rate in Japan are is 4% p.a. and 8% p.a., respectively. The investing and borrowing rate in the U.S. are 2% p.a. and 5% p.a., respectively. If the company hedges its transaction exposure by engaging in the money market hedge, how much USD will the company pay to the bank in a year?

Select one:

a. 248,769

b. 232,711

c. 244,053

d. 260,894

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Answer #1

Answer: Option (d.) 260,894

Payable after 1 Year          22,000,000 JPY
Spot Rate 0.0112 JPY/USD
1 Year Forward Rate 0.0125 JPY/USD
JPY USD
Borrowing Rate 4% 8%
Deposit Rate 2% 5%
Money Market Hedge:
Amount of JPY required to be Purchased and deposited now = X (Say)
X (1+0.02) = 22,00,000 JPY
X = 22,00,000 / 1.02
X = 21,568,627.45 JPY
Amount in USD required to be borrowed for puchasing JPY 21,568,627.45
Amount in USD required to be borrowed for puchasing USD 241,568.63
Amount required to be repaid after 1 Year = USD 241,568.63 (1+0.08)
Amount required to be repaid after 1 Year = USD 260,894.12
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