3. Trading in foreign exchange

What are spot rates and forward rates?

Purple Whale Foodstuffs Inc., a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for 625 million, but the Japanese firm has 60 days before it must make the payment to Purple Whale Foodstuffs Inc. The spot exchange rate is 127.50 per dollar, and the 60-day forward rate is 132.10 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar?

A) The yen is trading at a discount in the forward market.

B) In the forward market, the yen is trading at a premium.

If the customer pays Purple Whale Foodstuffs Inc. the 625 million today, how much will Purple Whale Foodstuffs Inc. receive in dollars?

A) $4.41 million

B) $4.90 million

C) $4.66 million

D) $5.39 million

Assuming that the forward market is correct and the spot exchange rate in 60 days will equal the 60-day forward exchange rate today, Purple Whale Foodstuffs Inc. would get more dollars if the Japanese firm paid off its account (Today/ In 60 days).