A Japanese IMPORTER Has a €1,000,000 PAYABLE Due in One

question 6

Multiple Choice

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. $$\begin{array} { l l l } \hline \text { Spot exchange rates } & 1 \text {-year Forward Rates } & \text { Contract size } \\\hline \$ 1.20 = € 1.00 & \$ 1.25 = € 1.00 & € 62,500 \\\$ 1.00 = \mathbf { Y 1 0 0 } & \$ 1.00 = \mathbf { Y } 120 & \mathbf { Y 1 } 2,500,000 \\\hline\end{array}$$ 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 above