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Exchange rate and risk between Japanese yen and the U.S. dollar

The exchange rate between the Japanese yen and the U.S. dollar is 110 yen = 1U.S$. Acme Company has decided to purchase goods for 45 million yen, with payment due in 8 months.

How many U.S. dollars would the company need to purchase the merchandise and pay for them today?

Has the yen appreciated or depreciated against the dollar If the exchange rate is 105 yen to 1$US in 8 months? Why?

How many U.S. dollars will be needed to pay for the goods if the exchange rate is 125yen to 1$US?

Which importer will endure the risk if payment is due in yen? The Japanese exporter or the U.S. importer? Please back up your reasoning.

What can a company do in order to protect itself against exchange rate risk?

Solution Preview

The exchange rate between the Japanese yen and the U.S. dollar is 110 yen = 1U.S$. Acme Company has decided to purchase goods for 45 million yen, with payment due in 8 months.

How many U.S. dollars would the company need to purchase the merchandise and pay for them today?

The exchange rate is 110 yen to 1 US$, implies that you get 110Yen for each US dollar. The goods are purchased for 45 million Yen. In terms of US dollars the amount would be
The company would need = 45,000,000/110 = U.S $ 409,090.91

Has the yen appreciated or depreciated against the dollar If the exchange rate is 105 yen to 1$US in 8 months? Why?

In this case 1 US$ now gets only 105 Yen when earlier it got 110 Yen. This implies that Yen has appreciated against the ...

Solution Summary

The solution explains how to calculate the exchange rates and the exhange rate risk

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