3. Trading in foreign exchange What are spot rates and forward rates? Green Rabb

Question

3. Trading in foreign exchange What are spot rates and forward rates? Green Rabbit Transportation Inc., a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for #689 million, but the Japanese firm has 60 days before it must make the payment to Green Rabbit Transportation Inc. The spot exchange rate is ¥129.20 per dollar, and the 60-day forward rate is x134.56 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar? O In the forward market, the yen is trading at a premium. O The yen is trading at a discount in the forward market. If the customer pays Green Rabbit Transportation Inc. the ¥689 million today, how much will Green Rabbit Transportation Inc. receive in dollars? $5.86 million O $5.33 million O $6.66 million $4.80 million Assuming that the forward market is correct and the spot exchange rate in 60 days will equal the 60-day forward exchange rate today, Green Rabbit Transportation Inc. would get more dollars if the Japanese firm paid off its account

Explanation / Answer

1)The yen is trading at discount since the dollar is a appreciating currency

2)correct option is "B"

amount received today = 689/129.2= $ 5.33 million

3)If the firm pays the amount today since the yen will depreciate in 60 days against US dollars which meanse you will received less dollars against yen .

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