You are a ?financial adviser to a U.S corporation that expects to receive a paym
ID: 1182383 • Letter: Y
Question
You are a ?financial adviser to a U.S corporation that expects to receive a payment of 40 million Japanese yen in 180 days for goods exported to Japan. The current spot exchange rate is 100 yen per US dollar. You are concerned that the US dollar is going to appreciate against the yen over the next six months. For example, if the dollar appreciated to 110 yen per US dollar, your payments denominated in US dollars would fall by 10%: How could you use the forward exchange markets to hedge against the risk of losses associated with the potential appreciation of the US dollar?Explanation / Answer
The firm would receive $363,636 (=¥40,000,000 / 110). 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. Answer: The firm could buy ¥40 million in call options on dollars at a rate of 105 ¥ per dollar. This would ensure the firm’s yen receipts will sell for at least this rate (between the current 100 and future 110 rate).
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