7. You are a financial adviser to a U.S. corporation that expects to receive a p

Question

7. You are a financial adviser to a U.S. corporation that expects to receive a payment of 60 million Japanese yen in 180 days for goods exported to Japan. The current spot rate is 100 yen per U.S dollar (ESA-0.01000). You are concerned that the U.S. dollar is going to appreciate against the ven over the next six months. a. Assuming the exchange rate remains unchanged, how much does your firm expect to receive in U.S. dollars? b. How much would your firm receive (in U.S dollars) if the dollar appreciated to 110 yen per U.S. dollar(Esy 0.00909)2 c. Describe how you could use an options contract to hedge against the risk of losses associated with the potential appreciation in the U.S. dollar.

Explanation / Answer

a. Expected income = 60 /100 = 0.6 million dollars
b. At new exchange rate, expected income = 60/110 = 0.55 million dollars
c. The firm can buy options contract for dollars now. Options contract allows the firm to buy dollars at a later date at an agreed upon price. It can set the agreed price between 100 yen per dollar to 110 yen per dollar to hedge against the risk.

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