Question

Money Market Hedge

Japanese Yen ¥ 250,000,000 Receivable

In 3 months Spot Rate ¥105/$

Forward 3 months is ¥100/$ 3M

iUS = 8% per year

iJPY = 7% per year

1. P.V. of receivable?

2. Covert P.V. of receivable at Spot rate?

3. At maturity loan?

Please show formulas and steps. Thank You

Answer 1

1) P. V. Of recievables :

i (JPY) quarterly = 7% * 3/12 months

i (JPY) quarterly = 1.75% or 0.0175

Recievables = ¥25,00,00,000

P. V. Of recievables = Recievables / (1 + i)

P. V. Of recievables = ¥25,00,00,000 / (1 + 0.0175)

P. V. Of recievables = ¥24,57,00,245.70

2) Convert P. V. Of recievables at spot rate

Spot rate = ¥105/$

P. V. Of recievables = ¥24,57,00,245.70

Now,

$ value of P. V. Of recievables = P. V. Of recievables / Spot rate

$ value of P. V. Of recievables = ¥24,57,00,245.70 / ¥105

$ value of P. V. Of recievables = $23,40,002.34

3) Borrowed in $ = $23,40,002.34 for 3 months

Interest rate in U. S. = 8%

Interest cost = Borrowed amount * Interest rate in $ * 3/12 months

Interest cost = $23,40,002.34 * 8% * 3/12 months

Interest cost = $46,800.05

Total loan repayable at maturity = Borrowed amount + Interest

Total loan repayable = $23,40,002.34 + $46,800.05

Total loan repayable = $23,86,802.39

Total maturity repayable in ¥ = Loan repayable in $ * Forward rate 3 months

Total maturity repayable in ¥ = $23,86,802.39 * ¥100

Total maturity repayable in ¥ = ¥23,86,80,239

Net gain = Recievables - Loan repayable

Net gain = ¥23,86,80,239 - ¥25,00,00,000

Net gain = ¥1,13,19,761