A Japanese EXPORTER Has a €1,000,000 Receivable Due in One

question 37

Multiple Choice

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Spot and forward exchange rate data given in the table: The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge exchange rate risk.

• A)Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the receivable.Convert €970,873.79 to dollars at spot, receive $1,165,048.54.Convert dollars to yen at spot, receive ¥116,504,854.
• B)Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1.Buy ¥150,000,000 forward using 11.52 contracts, at the forward rate of $1.00 = ¥120.
• C)Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1.Buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120.
• D)None of the above

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