Assume the spot rate on Friday between the JPY and USD was 101.25 JPY per USD. S

Question

Assume the spot rate on Friday between the JPY and USD was 101.25 JPY per USD. Suppose you are purchasing 2000000 JPY worth of microprocessors deliverable (product and payment) in 3 months with the contract set up between you and your supplier on Friday. How much is that shipment worth in USD. Assume that you want to hedge against exchange rate risk, and go to the bank on Friday. The financial specialist at the bank gives you the official 3 month forward rate at 101.18 JPY per USD. What does that imply for your payment to the bank in 3 months?

Explanation / Answer

Answer

Spot Rate 1$ = 101.25 JPY

So Shipment of 2000000 JPY will Worth at 2000000/101.25 = 19753.0864 $

If 3 Month FWD Rate is 101.18 JPY per US $ then it means US $ is at discount and JPY is at premium which means if we book the contract with our bank at fwd rate we have to give some extra dollars viz.

2000000 JPY / 101.18 $ = 19766.7523 $

So we will end up by paying 13.6659 US $ more (19766.7523-19753.0864 ) .

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