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

question 82

Multiple Choice

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk. $$\begin{array}{l}1 \text {-year rates of interest }\\\begin{array} { l l l } & \text { Borrowing } & \text { lending } \\\hline \text { Dollar } & 4.5 \% & 4.00 \% \\\text { Euro } & 6.00 \% & 5.25 \% \\\text { yen } & 1.00 \% & 0.75 \% \\\hline \text { Spot exchange rates } & 1 \text {-year Forward Rates } \\\hline \$ 1.25 = € 1.00 & \$ 1.2262 = € 1.00 \\\$ 1.00 = \pm 100 & \$ 1.03 = \pm 100 & \\\hline\end{array}\end{array}$$

• A)Borrow €970,873.79 today.Convert the euro to dollars at the spot exchange rate, receive $1,165,048.54.Convert these dollars to yen at the spot rate, receive ¥.
• B)Borrow €943,396.22 today.Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate, receive ¥117,924,528.30.
• C)Lend €943,396.22 today.Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate.
• D)Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25%.

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Definitions:

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