Question
Use the following information to answer the next two questions. XYZ (American firm) has a plant in Japan. XYZ anticipates that they will need 25,000,0000
Use the following information to answer the next two questions.
XYZ (American firm) has a plant in Japan. XYZ anticipates that they will need 25,000,0000 yen to meet next month's payroll. XYZ is considering entering into a forward contract to mitigate exchange rate risk. XYZ finds a bank that is willing to enter into a one month forward contract on 25 million yen at a forward rate of $.005/yen. Currently, the spot rate is $.004/yen. Assume that the spot rate is $.0045/yen when the forward contract expires.
What will XYZ do to mitigate its exchange rate risk?
Wait one month and buy 25 million yen to meet their payroll obligations | ||||||||||||||
Wait one month and sell 25 million yen to meet their payroll obligations | ||||||||||||||
Buy a forward contract on 25 million yen | ||||||||||||||
Sell a forward contract on 25 million yen
Find XYZ's profit/loss (in USD) from their forward contract.
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