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

question 62

Multiple Choice

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is 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 contract 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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Definitions:

Negligence

The failure to exercise the care that a reasonably prudent person would exercise in like circumstances.

Misrepresentations

False or misleading statements that can lead someone to enter into an agreement or make a decision under false pretenses.

Vicarious Liability

A legal principle where one party is held responsible for the actions or omissions of another party.

Vicariously Liable

The legal responsibility of one party for the actions of another, based on a special relationship, such as an employer being liable for the actions of an employee.