Question
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
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.
A British firm is set to receive 15,000,000 pesos from its overseas operations in 12 months. The company decides to enter into a 12 month forward contract for 15 million pesos to mitigate its price risk. The forward rate is 16 pesos/pound. Find the British firm's profit/loss (in terms of pounds) on the forward contract if the spot rate is 20 pesos/pound at expiration.
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