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Assumptions Values Spot rate (/$) 120.60 Spot rate, rupees/dollar (Rs/$) 47.75 Implied (calculated) spot rate (/Rs) 2.5257 180-day forward rate (/Rs) 2.4000 180-day Indian rupee
Assumptions |
| Values |
Spot rate (/$) |
| 120.60 |
Spot rate, rupees/dollar (Rs/$) |
| 47.75 |
Implied (calculated) spot rate (/Rs) |
| 2.5257 |
180-day forward rate (/Rs) |
| 2.4000 |
180-day Indian rupee investing rate |
| 8.000% |
180-day Japanese yen investing rate |
| 1.500% |
Currency agent's exchange rate fee |
| 4.850% |
P & G India's cost of capital |
| 12.00% |
5. Proctor and Gambles affiliate in India, P & G India, 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. P & G India wishes to hedge an 8.5 million 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 P & G India 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. If P&G India remains uncovered in its A/P exposure, how much will it owe if the exchange rate in 180 days is:
a) the same as the current spot rate?
b) the same as the current forward rate?
c) P&G India's expected exchange rate of 2.600 /Rs?
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