GED Corporation, located rhe United States, has an accounts payable ouligaton ot
ID: 2802825 • Letter: G
Question
GED Corporation, located rhe United States, has an accounts payable ouligaton ot ¥800 m lion payabln n one year to a barik inty The curent spot rate is ¥ 115 S 100 and the one year Torward rate is ¥110S1 00 The annual interest rate is 3 pecert Japan and peson rte United States. GED can also buy a one-year call option on yen at the strike price of $0.0080 per yen Sor a premiam of 0 010 ct per yen At what one year forward rate would GED be indiferent between money market hedging and forward market hedging? OV116/51.00 O ¥10951.00 ¥111 7551 00 ¥112 725100 A*Explanation / Answer
Let the one year forward rate be Yen x/$1
Thus using money market hedge the future dollar cost = Yen 800 million * 1.06*$1/(1.03*Yen 115)
= $7,159,138.88
Future dollar cost using forward hedge = Yen 800 million * $1/x
Now at point of indifference future dollar cost should be same in both cases. Thus $7,159,138.88 = Yen 800 million * $1/ Yen x
or, x = 800 million/7,159,138.88
= Yen 111.75/$1.00 (the 3rd option)
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