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US company XYZ , which generates revenue from all over the world, has one of the biggest sources of income in Tokyo. XYZ expects to
US company XYZ which generates revenue from all over the world, has one of the biggest
sources of income in Tokyo. XYZ expects to receive million from its Tokyo operations in
three months and another million in six months. It would like to lock in the exchange rate
on these two cash flows and thereby eliminate any risk of an unfavourable move in exchange
rates. The investment banker indicates that the threemonths forward $ rate is and
forward $ rate is What steps will the company XYZ use to hedge its exchange rate
risk? Show how the company locks its future revenue. What are limitations of forward
contracts?
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