Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

American Rapid Rail Inc. (ARR) has just signed a contract to purchase a high-speed train from Shinkasen Inc., a manufacturer in Japan for 14.95 billion.

American Rapid Rail Inc. (ARR) has just signed a contract to purchase a high-speed train from Shinkasen Inc., a manufacturer in Japan for 14.95 billion. The purchase was made in November 2023 with payment due six months later in May 2024. Because this is a sizable contract for the firm and because the contract is in Yen rather than dollars, ARR is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

  • The spot exchange rate, when the contract is signed, is 115.41/$
  • The six-month forward rate is 115.39/$
  • ARRs forecast for 6-month spot rates is 115.43/$

If a forward market hedge is executed, in 6 months, ARR will have to

Group of answer choices

pay $129.52 million to buy Yen forward

pay $129.54 million to buy Yen forward

pay $129.56 million to buy Yen forward

sell 14.95 billion forward to receive $129.56 million

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets Instruments And Institutions

Authors: Anthony M. Santomero, David Babbel

2nd Edition

0072358688, 9780072358681

More Books

Students also viewed these Finance questions

Question

Discuss three applications of Skinners research.

Answered: 1 week ago

Question

=+What would you say if the person were in front of you?

Answered: 1 week ago

Question

=+ How could you make it more engaging and entertaining?

Answered: 1 week ago