P&G India.

Procter and Gamble's 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 5.13% fee. Using the exchange rate and interest rate data in the popup window,

compare alternate ways below that P&G India might deal with its foreign exchange exposure. Assume a 360-day financial year.

a. How much in Indian rupees will P&G India pay in 180 days without a hedge if the expected spot rate in 180 days is assumed to be 2.52697/Rs? 2.3811/Rs? 2.6473/Rs?

b. How much in Indian rupees will P&G India pay in 180 days with a forward market hedge?

c. How much in Indian rupees will P&G India pay in 180 days with a money market hedge?

d. How much in Indian rupees will P&G India pay in 180 days with a currency agent hedge?

e. What do you recommend?

a. How much in Indian rupees will P&G India pay in 180 days without a hedge if the expected spot rate in 180 days is assumed to be 2.52697/Rs?

Spot rate 180-day forward rate Expected spot, 180 days 180-day Indian rupee investing rate 180-day Japanese yen investing rate Currency agent's exchange rate fee P&G India's cost of capital 2.52697/Rs 2.3811/Rs 2.6473/Rs 7.78% 2.73% 5.13% 11.81%