Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Proctor 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
Proctor 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 a 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 (/$) 120.60 Spot rate, rupees/dollar (Rs/$) 47.75 Implied (calculated) spot rate (X/RS) 2.5257 (120.60 / 47.75) 180-day forward rate (/Rs) 2.4000 Expected spot rate in 180 days (W/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% IF
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered 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