Question $5$

A Japanese firm, Sushu, imports grain from the United States. The cost of their latest shipment

is $$377287.$ Payment is due in three months in dollars. Sushu has obtained the following

exchange rates and interest rates from Wasabi Bank.

a$)$ Describe the nature of your transaction risk.

b$)$ Determine the type of forward rate contract Shushu should take out and calculate the

cost to the company of the import shipment in Yen, if they take out the forward cover.

c$)$ Sushu is considering a money market hedge to eliminate their transaction risk. Calculate

the three$-$month cost of this strategy in Yen.

d$)$ Sushu can obtain finance from Wasabi Bank at the rate quoted in the table. If their

supplier is offering a $0\mathrm{.}5\%$ discount for immediate payment, calculate the three$-$month

cost to Sushu in Yen if they borrow and pay immediately.

e$)$ State which of the three strategies in b$),$ c$)$ or d$)$ above should be adopted by Sushu and

the reason for your choice.