Purple Whale Foodstuffs Inc., a U.S. company, produces and exports industrial ma

Question

Purple Whale Foodstuffs 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 Purple whale Foodstuffs Inc. The spot exchange rate is ¥129.20 per dollar, and the 60-day forward rate is ¥134.56 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the US. 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 Purple whale Foodstuffs Inc. the ¥689 million today, how much will Purple whale Foodstuffs Inc. receive in dollars? O $5.33 million O $6.66 million O $6.13 million O $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, Purple Whale Foodstuffs Inc. would get more dollars if the Japanese firm paid off its account in 60 days today

Explanation / Answer

Question1

Based on Spot rate, exchange rate 1US$ = 129.20 Yen

60days forward exchange rate 1US $ = 134.56 Yen

This means 1 US$ would be able to buy more yen after 60 days. This implies US$ is trading at premium or Yen is trading at discount in forward market. Hence. option 2 is correct.

QUESTION 2

Based on spot market, exchange rate 1 US$ = 129.20 Yen

or, 129.20 Yen = 1 US$

So, 689 Yen = ? US$

689 Yen = (689/129.20) US$ = $5.33

Hence 689 mil Yen = 5.33 mil US$

So, answer is option 1

QUESTION 3

In order to answer this question,let us calculate the value of 689mil yen in USD using 60-day forward exchange rate

Using 60 days exchange rate, 689 mil Yen = (689/134.56) mil USD = US $5.12 mil

Hence, Purple Whale would get more dollars, if it was paid off TODAY

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