A Japanese Importer Has a €1,000,000 Payable Due in One

question 30

Multiple Choice

A Japanese importer has a €1,000,000 payable due in one year. $\begin{array}{ccccc}\text { Spot exchange rates } & \text { 1-year Forward Rates } & {\text { Contract size }} \\\$ 1.2 C=€ 1.00 & \$ 1.25=€ 1.0 \mathrm{C} & €62,500 \\\$ 1.0 \mathrm{C}=¥ 100 & \$ 1.00=¥ 12 \mathrm{C} & ¥ 12,500,000\end{array}$ 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 his exchange rate risk.Have an estimate of how many contracts of what type.

• A)Go short in 12 yen forward contracts.Go long in 16 euro contracts.
• B)Go long in 12 yen forward contracts.Go short in 16 euro contracts.
• C)Go short in 16 yen forward contracts.Go long in 12 euro contracts.
• D)none of the options

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