Question
On 1 July 2017, Mamamia, a Japanese-based automobile company, contracts two foreign currency loans for three months, as follows: USD 450 million EUR 350 million.
On 1 July 2017, Mamamia, a Japanese-based automobile company, contracts two foreign currency loans for three months, as follows: USD 450 million EUR 350 million. The loans are floating rate loan with bullet repayment in terms of capital and interest. Mamamias home currency is the Japanese yen (JPY). Mamamia decides to fully hedge the currency risk of the principal value of the loan for the next three months. Foreign Exchange Rates on 1 July 2012 were as follows:
Spot rate (JPY/ 1USD) =115.90 Spot rate (JPY/1 EUR) =155.75 September dollar futures contract (JPY/1 USD)(contract size = USD 100,000)=115.70 September Euro futures contract (JPY/1EUR)(contract size = EUR 100,000)=156.70 Required: (a) State the futures positions that Mamamia should take on 1 July 2012, to hedge the loans` currency risk. (b) Calculate the number of contracts required for the hedge On 30 September 2012, Mitsui is informed that loan repayments inclusive of interest are as follows: USD 472.5 million; and EUR 367.5 million. Foreign exchange rates data on 30 September 2012 were as follows: Spot rate (JPY/1 USD) =125.30 Spot rate (JPY/1 EUR) =165.40 September dollar futures contract (JPY/1USD)(contract size = USD 100,000)=125.55 September euro futures contract (JPY/EUR)(contract size = EUR 100,000) (JPY/EUR)=166.76 (c) Evaluate the effectiveness of the Mamamias hedge by comparing the fully hedged position with the unhedged position.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started