P & G 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. Using the following exchange rate and interest rate data, recommend a hedging strategy.

Assumptions

Values

180-day account payable, Japanese yen ()

8,500,000

Spot rate (/$)

120.00

Spot rate, rupees/dollar (Rs/$)

48.00

180-day forward rate (/Rs)

2.4000

The expected spot rate in 180 days (/Rs)

2.6000

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%

Please select the right answer and fill in.

• The implied cross rate of Yen/Rupee= ___________________
• a. 2.3
• b. 2.4
• c. 2.5
• d. 2.6
• e. 2.7
• f. 2.8
• P and G India should___________
• a. buy a Yen forward b. sell a Yen forward c. borrow 8.5 million Yens now.
• If there exists a market of currency market of Yen denominated in rupees, P and G India should hedge the yen risk by_________
• a. buy a yen call and buy a yen put b. buy a yen call and sell a yen put c. sell a yen call and buy a yen put d. sell a yen call and sell a yen put.
• Please calculate the present value of cash flow if P&H India uses the agent and fixed exchange rate ______________(Hint: Consider one half of the cost of capital as the discount rate and add the fixed fee 4.85%)