Question

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward

Answer 1

Answer:

$ 47,500

Explanation:

The 60 day Forward rate is USD 0.0095 per JPY

5,000,000 JPY x 0.0095USD = 47,500 USD

The company would receive $ 47,500 at the maturity date.

Answer 2

Answer:

$47,500

Explanation:

A hedge is an investment position that is a strategic technique of employing financial instruments (such as a forward contract) or market techniques to offset or guide against all possible losses or gains that may result from a particular investment.  

Since the position is hedged by selling Japanese yen forward, the relevant rate to use to calculate the number of dollars to receive for the 5,000,000 yen 60 days from now is the forward rate of $.0095. We therefore have:

The dollar amount to receive = 5,000,000 Japanese yen × $0.0095 forward rate = $47,500

Therefore, $47,500 will be received for the 5,000,000 yen 60 days from now if the company sells yen forward.