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A US Firm Owes ¥10 Million Three Months from Now

question 60

Essay

A U.S. firm owes ¥10 million three months from now. The spot exchange rate is ¥95/$ and the forward rate is ¥96/$. Is the yen selling at a forward premium or discount, related to the dollar? Does the firm face exchange risk? Should the firm buy yen now or later?


Definitions:

Unanimity

Complete agreement among all members or participants in a particular decision or vote.

Voting Structure

The method or system used to carry out the process of voting or making decisions within an organization or a country.

Economic Efficiency

The optimal distribution of resources in a society, minimizing waste and maximizing value.

Government Failure

A situation in which the structure of incentives is such that the political process, including democratic political decision-making, will encourage individuals to undertake actions that conflict with economic efficiency.

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