As an importer of electric equipments and machineries to Vietnam from Japan, you have agreed to pay JPY 1 million in 90 days. The spot exchange rate is VND 203 per JPY. The 90 day interest rate is 1.78% p.a. in Vietnam and 0.1% p.a. in Japan.

Task 1:Briefly describe the nature of the foreign exchange exposure faced by the Vietnamese importer. (2 Marks)

Task 2: It is often claimed that the forward exchange rate is set by arbitrage to satisfy the covered interest rate parity. Explain how interest parity can be satisfied between Vietnam and Japan. (3 Marks)

Task 3: Calculate the expected 90 day forward rate assuming the covered interest rate parity holds between Vietnam and Japan. (2 Marks)

Task 4: Assuming expected future spot rate in 90 days would be VND 215 per JPY, explain what is the optimal hegding strategy (forward market hegding or money market hedging) in this situation. You need to show the calculations and justify your decision based on your calculations. You are not expected to explain how you do the calculation but you need to interpret your calculated values. (8 Marks)