Question
A Japanese company is planning to import electronic components from the United States. The company requires 500,000 units of a particular compo- nent per month
A Japanese company is planning to import electronic components from the United States. The company requires 500,000 units of a particular compo- nent per month for its production. Its currently August 25, 2021, and the company is preparing its financial budgets for the next year.
The current exchange rate is 110 per USD. The company is considering hedging its currency risk using forward contracts. The forward rates for USD/JPY for the next 12 months are as follows:
Sep 2021 112
October 2021 113
November 2021 114
December 2021 115
January 2022 116
February 2022 117
March 2022 118
April 2022 119
May 2022 120
June 2022 121
July 2022 122.
The cost of each component is $10, and the company plans to import the components for the entire year.
1) Provide recommendations on whether and how the company should hedge its currency risk.
2) If the company decides to hedge, calculate the total cost of importing the electronic components for the entire year under different scenarios: with and without hedging.
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Introduction To Corporate Finance
Authors: William L. Megginson, M.D. Lucey Brian C., Scott J. Smart, Scott B. Smart, Bill Megginson
1st Edition
184480562X, 9781844805624
