A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. The Japanese firm has an asset/liability position in dollars. The Japanese firm faces the risk that the yen will appreciate/depreciate. How can the firm hedge this risk (be specific and detailed)?

A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. The Japanese firm has an asset/liability position in dollars. The Japanese firm faces the risk that the yen will appreciate/depreciate. How can the firm hedge this risk (be specific and detailed)?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 3P

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A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. A. The Japanese firm has an asset/liability position in dollars. B. The Japanese firm faces the risk that the yen will appreciate/depreciate. C. How can the firm hedge this risk (be specific and detailed)?
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$2.00 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.80 per F$. Suppose that Retrojo negotiates a forward contract with a bank, which commits it to purchasing Fijian dollars at F $2,000,000.00 at $0.80 per Fijian dollar in 90 days. Thus, Retrojo knows with certainty that it will need F$2,000,000.00×$0.80 per Fijian dollars =$1,600,000.00 for this exchange. Assume the Fijian dollar depreciates over this time period to $0.67 per Fijian dollar. If this were the case the outside of the contract only (U.S. dollars) would be needed to exchange for the required F$2,000,000.00.
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