A Japanese Importer Has a €1,000,000 Payable Due in One

A Japanese importer has a €1,000,000 payable due in one year. $\begin{array}{ccccc}\text { Spot exchange rates } & \text { 1-year Forward Rates } & {\text { Contract size }} \\\$ 1.2 C=€ 1.00 & \$ 1.25=€ 1.0 \mathrm{C} & €62,500 \\\$ 1.0 \mathrm{C}=¥ 100 & \$ 1.00=¥ 12 \mathrm{C} & ¥ 12,500,000\end{array}$ The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge his exchange rate risk.Have an estimate of how many contracts of what type.

A) Go short in 12 yen forward contracts.Go long in 16 euro contracts.
B) Go long in 12 yen forward contracts.Go short in 16 euro contracts.
C) Go short in 16 yen forward contracts.Go long in 12 euro contracts.
D) none of the options

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free