2. Hindustan Lever. Unilever's affiliate in India, Hindustan Lever, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. Hindustan Lever wishes to hedge an 8.5 mil- lion Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like Hindustan Lever to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy.

Transcribed Image Text:

Spot rate, yen/dollar: Spot rate rupees/dollar 180-day forward 180-day rupee 120.60/$ investment rate: 8.000% 180 day yen R5471575 investment rate: 1500% Hindustan Lever's 12.00% rate, yen/rupee: 2.4000/Rs cost of capital: Expected spot Jate in 180 days 2.6000/Rs