Suppose your job is to ensure that your firm has enough foreign exchange on hand to pay outstanding accounts payable. Assume your firm owes 1 million yen to a Japanese supplier, which is due exactly 60 days from now.

Your task is to exchange dollars for the right amount of yen. To do this, you can enter a contract with a bank today to buy 1 million yen 60 days forward or wait 60 days and buy 1 million yen at the then-prevailing spot exchange rate.

Which alternative do you prefer, and why? If you expect the spot rate 60 days from now will be the same as it is today, what is the expected dollar cost of buying 1 million yen in the spot market 60 days from now? How many dollars will it cost you to obtain 1 million yen if you entered the forward contract? To obtain the spot exchange rates, go to www.ft.com and click Markets and then choose Currencies or go to globalEDGE™ and enter “exchange rates” in the search engine.

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