Please show work (formula) Question 4. (15 points) A U.S. company orders merchan
ID: 2790804 • Letter: P
Question
Please show work (formula)
Question 4. (15 points) 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 . Exchange rates shown below.
Yen per $1
$ per 1 yen
Spot
101.78
0.00983
30-day forward
99.45
0.01006
90-day forward
97.2
0.01029
180-day forward
95.14
0.01051
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 3 ways in which the company can reduce exchange rate risk.
Yen per $1
$ per 1 yen
Spot
101.78
0.00983
30-day forward
99.45
0.01006
90-day forward
97.2
0.01029
180-day forward
95.14
0.01051
Explanation / Answer
Please provide feedback.. Thanks in advance.. :-)
There is no formula to convert $ into yen or Yen into $. You just have to focus of What rate is given to you and what is to be converted into what.
a Yen payable today = (in Million) ¥ 100.00 Spot Rate = $/Yen = 0.00983 $ Required today for payment = (0.00983x100) $ 0.98 If you wish to use the inverse rate then - Spot Rate = yen/$ = 101.78 $ Required today for payment = (100/101.78) $ 0.98 b As you can see - We are getting less yen per dollar (101.78 - 99.45 - 97.2) This means yen price is increaseing On the other hand dollar per yen is increaseing (0.0098 - 0.01006 - 0.01029) Means now we can buy more dollars out of yen then before This represents appreciation in Yen and depreciation in Dollars c Yen payable today = (in Million) ¥ 100.00 90 days fwd rate $/Yen = 0.01006 $ Required today for payment = (0.01006x100) $ 1.01 If you wish to use the inverse rate then - 90 days fwd rate yen/$ = 99.45 $ Required today for payment = (100/101.78) $ 1.01 d The us company is bearing exchange rate risk as in any case japanese company will get their payment of 100 million yen but outflow of us company is uncertain.(this may be avoided by Invoicing is us $ instead of Yen) e The three ways of reducing exchange rate risk are - - Forward Contract - using this technique us company can make there $ outflow certain. (buy 100 yen forward) - Currency options - Currency options give the investor the right, but not the obligation, to buy or sell a currency at a specific rate on or before a specific date. They are similar to forward contracts, but the investor is not forced to engage in the transaction when the contract's expiration date arrives. - Exchange traded funds - There funds provide long and short duration exposures for difference currencies.