A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. A. The Japanese firm has an asset/liability position in dollars. B. The Japanese firm faces the risk that the yen will appreciate/depreciate. C. How can the firm hedge this risk (be specific and detailed)?

A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. A. The Japanese firm has an asset/liability position in dollars. B. The Japanese firm faces the risk that the yen will appreciate/depreciate. C. How can the firm hedge this risk (be specific and detailed)?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

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A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. The Japanese firm has an asset/liability position in dollars. The Japanese firm faces the risk that the yen will appreciate/depreciate. How can the firm hedge this risk (be specific and detailed)?
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Please answer both subparts. 1. The following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436