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DanielleElmas [232]
3 years ago
13

YZ Corporation, located in the United States, has an account payable of 750-million yen payable in one year to a bank in Tokyo.

The current spot rate is yen 116 per $ and the one year forward rate is yen 109 per $. The annual interest rate is 3 percent in Japan and 6 percent in the United States (assume the same lending and borrowing rates). The future (in one year) dollar cost of meeting this obligation using the money market hedge is:
Business
1 answer:
EleoNora [17]3 years ago
8 0

Answer:

Dollar cost of the foreign payable = $  6,653,833.28  

Explanation:

The money market hedge would be set up as follows:

<em>Step 1: Deposit in Yen (Tokyo)</em>

Deposit an amount in Yen  equal to

Amount to be deposited= Payable/(1+deposit rate)

= 750,000,000/(1.03)

=  Yen 728,155,339.8

<em>Step 2 : Convert the sum</em>

Convert Yen 728,155,339.8 at the spot rate  of yen 116 per $

Dollar amount =  728,155,339.8   / 116

                         = $ 6,277,201.205

<em>Step 3: Borrow at home (US)</em>

Borrow $ 6,277,201.205  for one year at an interest rate of 6%

Amount due (inclusive of interest) = Amount borrowed × 1.06

                                                       =$ 6,277,201.205 × 1.06

                                                        = $  6,653,833.28  

Dollar cost of the foreign payable = $  6,653,833.28  

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