Question

What are spot rates and forward rates? Purple Panda Importers, a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for ¥625 million, but the Japanese firm has 60 days before it must make the payment to Purple Panda Importers The spot exchange rate is ¥132.78 per dollar, and the 60-day forward rate is ¥134.72 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar? The yen is trading at a discount in the forward market. In the forward market, the yen is trading at a premium. If the customer pays Purple Panda Importers the ¥625 million today, how much will Purple Panda Importers receive in dollars? $5.42 million $4.24 million $5.89 million $4.71 million Assuming that the forward market is correct and the spot exchange rate in 60 days will equal the 60-day forward exchange rate today, Purple Panda Importers would get more dollars if the Japanese firm paid off its account .

Answer 1

Answer:

1. As you have to spend more Yens for 1 USD at future date, it means that Yen is selling at discount in the forward market relative to the US Dollar.

2. The spot exchange rate is ¥132.78 per dollar, hence, total dollars Purple Panda Importers will receive today is ¥625 million/¥132.78 = $4.71 million

3.  Purple Panda Importers would get more dollars if the Japanese firm paid off its account today.That is, he will get more money if the account is paid today.