A U.S. company orders merchandise from a Japanese company at a cost of 100 milli

Question

A U.S. company orders merchandise from a Japanese company at a cost of 100 million yen. The merchandise must be paid for in yen

a. How many U.S. dollars must be raised if payment is due today?

b. Is the dollar appreciating or depreciating against the yen? Explain.

c. How many U.S. dollars must be raised if payment is due in 90 days?

d. Who bears exchange rate risk, the U.S. company or the Japanese company or both? Explain.   

e. Describe 2-3 ways the company can reduce exchange rate risk.

Explanation / Answer

Spot Rate $=0.01025 YEN

A. IF Paid today then $ =100 million yen*0.01025

   =$ 1.025 million Doller

B. dollar depreciating against the yen because Yen Strengthen in Forward rate. as Price of per yen in terms of Dollar is increasing. it can be said that Dollar is depreciating in future.

C.90 Days Forward $ =0.01038 yen

  Payment in $ =100 million*0.01038

   =$ 1.038 million

D.US Company bears exchange rate risk because Dollar is depreciating in future and US Co. has exposure of Payment.

e. We Can Use any of Following Ways to Reduce Currency risk-

1. Forward Hedge

2.Money Market Hedge

3. Future Forwards

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