2) Sakura Inc. (a Japanese kitchen appliance company) purchased $1 million of ki

Question

2) Sakura Inc. (a Japanese kitchen appliance company) purchased $1 million of kitchen appliances from a U.S. firm, payable in 6 months. Currently, the 6-month forward exchange rate is $1=¥121.32 and the foreign exchange advisor predicts that the spot exchange rate is likely to be $1=¥123.55 in 6 months.

(1) What is the expected gain/loss from a forward hedge if the foreign exchange advisor’s prediction is correct?

(2) If you were the financial manager of Sakura, would you recommend hedging this USD payable? Why or why not?

Explanation / Answer

1) The Expected Gain/loss from forward hedge is $1=¥ 2.23 and yes the foriegn exchange advisor's prediction os correct

2) If I am Finance Manager of Sakura, I would be recommened hedging this UDS payable, because thie payable is for next 6 months and I have time recover the loss with my gains in the next 6 months duration.

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