Question

One of your company's essential suppliers is located in Japan. Your company needs to make a 1 million Japanese yen payment in six months. Considering that your company primarily operates in U.S. dollars, you are assigned the task of deciding on a strategy to minimize your transactions exposure. Identify the spot and forward exchange rates between the two currencies. What factors influence your decision to use each? Which one would you choose? How many dollars must you spend to acquire the amount of yen required

Answer 1

I will be trying to take my foreign exposure through forward exchange rate because my payment is due in Japanese in 6 months and I will be trying to hedge the exposure due to the appreciation of the Japanese yen because when the Japanese Yen will be going up, it will mean that the overall payment to the Japan supplier will be increasing from my perspective and I will be trying to hedge my risk of increasing payments to Japanese yen.

I will be trying to go long on Japanese Yen in futures market so that it will be helping me to hedge with the risk of appreciation of Japan Yen and my overall payment exposure will remain the same.

I will be taking the adequate United States dollar after dividing with 1 million of Japanese with the forward rate exchange of United States dollar.