) Suppose that a U.S. Örm signs a contract to buy factory equipment from a Japan

Question

) Suppose that a U.S. Örm signs a contract to buy factory equipment from a Japanese
Örm at a cost of U250 million. The equipment is to be delivered to the U.S. and paid for
in one year. The current exchange rate is U250/$1. The current interest rate is 6% in the
United States and 4% in Japan.
(a) If the U.S. Örm trades dollars for yen today and invests the yen in Japan for one year,
how many dollars does it need today?
(b) If the U.S. Örm enters a futures contract, agreeing to buy U250 million in one year at
an exchange rate of U245/$1, how many dollars does it need today to invest at the U.S.
interest rate of 6%?
(c) If the U.S. Örm invests in the U.S. at 6% today, without entering into any other type
of contract, does the Örm know how many dollars it needs today to fulÖll its equipment
contract in one year?
(d) Which method described in (1)-(2) is the U.S. Örm likely to prefer, given the future
contract exchange rate of U245/$1? What does the futures contract exchange rate have
to be in (2) for the results in (1) and (2) to be equivalent?

Explanation / Answer

1. us needs = 1million /(1+0.04) $ today = .9615 million $ today 2. (250/245)/(1+0.6) million $ = .9626 million $ 3. 1 million 4 . Prefer 1 because then US WILL HAVE TO INVEST LESS. PLEASE RATE

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