Question

3. One component of learning about another country or region is to understand the relationship of its currency with others on the world currency market. As such, you are assigned the duty of ensuring the availability of 100,000 yen for a payment scheduled next month. Considering that your company possesses only U.S. dollars, identify the spot and forward exchange rates. What are the factors that 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

At present,

The spot exchange rate is Yen 112.31 / US Dollar.

The one month forward rate is Yen 112.29 / US Dollar.

The factors affecting the decision to opt for the spot or forward rate are as follows:

1. The movement of Yen against the dollar in the coming period. If the Yen is to appreciate against the dollar in the coming month as per the forward rate, then more US dollars will be used to buy the 100000 Yen. In this case, it is better to buy the yen now with the spot rate.

If the Yen is to depreciate against the dollar in the coming month as per the forward rate, then less US dollars will be used to buy the 100000 Yen. In this case, it is better to buy with the forward rate after one month.

1. Inflationary impact in both the economies, making fluctuations in the forex rate between the Yen and the US dollar
2. Economic scenario and the interest rate level in Japan and the USA
3. BOP positions of USA and the Japan that affect the exchange rate between Yen and US dollars

In present scenario, I will opt for the spot rate.

If spot rate is opted,

Then,

Dollars used to acquire 100000 Yen = 100000/112.31 = $890.393

If 1 month forward rate is opted,

Then,

Dollars used to acquire 100000 Yen = 100000/112.29 = $890.551

As per the above calculations, spot rate will be used and $890.393 will be spent to acquire the 100000 Yen.