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    Evaluate transactions in US dollars & Japanese Yen; exchange rate risk.

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    Problem 1: The exchange rate between the Japanese yen and the U.S. dollar
    is 105 yen = 1 U.S. dollar. A U.S. company agrees to purchase goods for 40 million yen,
    with payment due in 6 months.

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

    b. Has the yen appreciated or depreciated against the dollar if the exchange
    rate is 100 yen to 1 U.S. dollar in 6 months? Why?

    c. How many U.S. dollars will be needed to pay for the goods if the exchange
    rate is 110 yen to 1 U.S. dollar?

    d. Does the Japanese exporter or the U.S. importer bear the risk if payment is
    due in yen? Why?

    e. How can a company protect itself against exchange rate risk?

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    Solution Preview

    Problem 1: The exchange rate between the Japanese yen and the U.S. dollar is 105 yen = 1 U.S. dollar. A U.S. company agrees to purchase goods for 40 million yen, with payment due in 6 months.

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

    The payment is due in 6 months, so nothing is needed to pay today. At today's spot rate the payment due in dollar terms is =US$ 40/105 million
    =US$380,952

    b. ...

    Solution Summary

    The expert evaluates transactions in US dollars and Japanese Yen. The exchange rate is examined.

    $2.19