1. On 1st January, XYZ, a US company, purchased inventory from a Japanese supplier for ¥100,000,000, with payment to be made on 28th February. At the same time, it decided to enter into a forward contract to hedge the yen liability. Suppose the following exchange rates relative to the transaction:
¥110 per $ January 1 spot rate
¥108 forward rate quoted on January 1 for delivery on 28th February
¥109 spot rate on 31st January
¥109 forward rate quoted on January 31 for delivery on February 28
¥112 spot rate on February 28
Find how many dollars would XYZ have to pay the Japanese supplier, and what would be the dollar value of the purchase?
2. On 1st January, XYZ, a US company, sold inventory to a Japanese supplier for ¥100,000,000, with payment to be received on 28th February. At the same time, it decided to enter into a forward contract to hedge the yen receivable. Suppose the subsequent exchange rates relative to the transaction:
¥108 per $ January 1 spot rate
¥110 forward rate quoted on January 1 for delivery on 28th February
¥108.5 spot rate on 31st January
¥109 forward rate quoted on January 31 for delivery on 28th February
¥112 spot rate on February 28
Find how many dollars would XYZ receive after converting the proceeds from the Japanese customer, and evaluate what would be the dollar value of the sale?
3. Suppose that Apex Inc., a US based company, sells merchandise to Products PLC, a British customer, and has to denominate sale in British pounds with payment to be received in 90 days. Apex will get £500,000 from the importer. In order to hedge the receivable, Apex decides to use British pounds for 90 days at 12 % and deposit the pounds in an interest-bearing account.
a) Find how much will Apex have to borrow to cover its receivable?
b) If Apex deposits the money in an interest-bearing account yielding 8 %, what will be the cash received from the sale, suppose no tax effect? The spot rate at the starting of the transaction is $1.8500 per pound, and the rate 90 days later is $1.8000.
4. Suppose that Apex Inc., a US based company, sells merchandise to Quigley Inc., an Australian importer and has to denominate sale in Australian dollars with payment to be received in 90 days. Apex will receive A$500,000 from Quigley. In order to hedge the receivable, Apex decides to borrow Australian dollars for 90 days at 10 percent and deposit the Australian dollars in an interest-bearing account.
a) How much will Apex have to borrow to cover its receivable?
b) If Apex deposits the money in an interest-bearing account yielding 8 percent, what will be the cash received from the sale, assuming no tax effect? The spot rate at the beginning of the transaction is A$1.2907 per US dollar, and the rate 90 days later is A$1.3500.