Question 1: An US organization's affiliate in India procures much of its 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. The Indian affiliate wishes to hedge a 20 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Using the following exchange rate and interest rate data, recommend a hedging strategy.

180-day account payable, Japanese yen () 20,000,000

Spot rate (/$) 118.95

Spot rate, rupees/dollar (Rs/$) 64.79

180-day forward rate (/Rs) 1.8258

Expected spot rate in 180 days (/Rs) 1.8555

180-day Indian rupee investing rate 8.000%

180-day Japanese yen investing rate 1.500%

The organization's cost of capital 14.00%

[Please note: show full calculation steps and relevant justifications]

Question 2:

A U.S. firm exports radiators to several Chinese auto-manufacturers in China. Sales are currently 20,000 units per year at the yuan equivalent of $25,000 each. The Chinese yuan has been trading at CNY6.2/$; however the firm's analyst predicts that the value of CNY will devalued against USD to CNY7/$ very soon and it will remain at this value for several years. Acknowledging this forecast, the firm's executives are faced with making a pricing decision in the face of upcoming devaluation. The two choices are:

i. Maintaining the same yuan price, and no change in Chinese sales volume

ii. Maintaining the same dollar price, and experience a 10% decrease in Chinese sales volume.

Which of these choices would you recommend? Assume that direct costs are 60% of the U.S. sales price.