Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥100 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is 99¥/$ (¥99 = $1). The current interest rate on one-year U.S. Treasury bills is 4%, and the current interest rate on one-year Japanese government bonds is 6%. Please show work for folllowing questions.
a) If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, how many dollars does it need to exchange today in order to have ¥100 million in one year?
b) If Halliburton enters a forward contract, agreeing to buy ¥100 million in one year at an exchange rate of ¥102 = $1, how many dollars does it need today if it plans to invest the dollars at the U.S. interest rate of 4%?
c) Which method (a) or (b) is Halliburton likely to prefer?