Question

Obtain quotes for foreign exchange rates for the Yen versus the US dollar, and answer the following questions (6 points)

a) What is the spot exchange rate for the US dollar vis-à-vis the yen? (1 point)

b) Suppose one year ago, the spot exchange rate for the yen was ¥100/$. Comparing that to today's quote, has the US$ appreciated or depreciated? By what %? (2 points)

c) Suppose you export 100,000,000 (100 million) yen worth of goods to Japan today (what is that worth at Monday’s spot rate?) But your buyer will make the payment only 90 days from now. Suppose further that the buyer will make the payment in Japanese yen only.

d) Suppose the actual exchange rate for the yen, 90 days from now, turns out to be ¥100/$. How many

dollars will you get 90 days from now?

e) Suppose the actual exchange rate for the yen, 90 days from now, turns out to be ¥120/$. How many

dollars will you get 90 days from now?

f) Suppose you are like me, a conservative old man, who does not like this exchange rate uncertainty. Is

there anything you could do to get rid of the uncertainty? (3 points)

Answer 1

Google search shows 1$= 108.58 yen

for the purpose of question, we can take it as 108 yens

A)

Spot exchange rate Yen/$= 108

Spot rate is the current rate, i.e the rate being offered today

B)

1 Year Ago

Spot Rate Yen/$=

100

Today's

Spot Rate Yen/$=

108

The US dollars has appreciated and yen has weaken( As now we get more yens in exchange of 1$

Change in spot rates = New spot - Old Spot

Change in the spot rates 108-100=8

% Change = 8/100*100= 8%

C)

Export Size= 100000000 Yen

Worth of the export order as per Monday's spot rate, taking it 108 again= 100,000,000/108

=

$           925,926

If the buyer will make payment after 90 days in japenese yen, then there is a chance that the exporter might loose if yen becomes stronger

vice versa there is a probability that us $ strengthens then the exporter will gain

D)

Actual rate turns out to be 1$= 100 Yen

Order was booked @ 1$ = 108 Yen

From the above situation we can make out that $ has depreciated and so it will have a positive effect for the exporter

But remember this is because the buyer is paying in yen, had the invoiced currency been $, the situation would have been different

Amount to be recived in $ when rate was 108 = 100,000,000/108 =$925926

Now the actual amount received in $ when rate is 100 = 100,000,000/100= $10,00,000

Gain=

1000000-925926=

$      74,074

E)

Actual rate turns out to be 1$= 120 Yen

Order was booked @ 1$ = 108 Yen

From the above situation we can make out that $ has appreciated and yen has become weaker, now the exporter will loose

But remember this is because the buyer is paying in yen, had the invoiced currency been $, the situation would have been different

Amount to be recived in $ when rate was 108 = 100,000,000/108 =$925926

833333.3

Now the actual amount received in $ when rate is 100 = 100,000,000/120= $8,33,333

Loss =

925926-833333 =

$ 92,593.00

F)

Remember if the buyer had to pay in dollars, then the exporter would have received the same amount and the buyer would have gained or loose

from the price fluctuations

As a expoter to be safe from uncertainity of fluctuations we can use combinations of forward contracts and options

If there is no compulsion to raise the invoice in yen, the exporter can simply raise a invoice in $ at a fixed rate and stay sfae from the risk