Suppose you are working as a portfolio manager for Goldman Sacks and advising Johnson & Johnson,...

Suppose you are working as a portfolio manager for Goldman Sacks and advising Johnson & Johnson, a U.S. Pharmaceutical company, that expects to receive a payment of 500 million Japanese yen in 180 days for goods exported to Japan. The current spot exchange rate is 100 yen per U.S. dollar (e _yen/$=100, or e _$/yen =0.01). You are concerned that due to recent events in Japan, the U.S. dollar is expected to appreciate against the yen over the next 6 months.
1. Assuming the spot exchange rate remains unchanged, how much does the U.S. company, Johnson & Johnson, expects to receive in U.S. dollar?
2. How much would Johnson & Johnson receive (in U.S. dollars) if the dollar appreciated to 110 yen per U.S. dollar (e _yen/$=110, or e _$/yen =0.009091)? Compute.
3. Describe how you could use the forward market to hedge against the risk of losses associated with the potential appreciation in the U.S. dollar. Explain the steps.

Expert Solution

jeff jeffy answered 2 years ago

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