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:

Null Hypothesis

The default hypothesis in statistical testing that assumes no effect or difference, stating that any observed variability is due to chance.

Directional

Pertains to hypothesis testing or research questions that specify the direction of the expected relationship or difference between variables.

Entire Population

Refers to all members or elements of a defined group or category that a researcher is studying.

Null Hypothesis

A hypothesis in statistical analysis that suggests there is no effect or no difference, and it serves as a starting assumption for testing.