A Japanese exporter has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is given: Spot exchange rates 1-year Forward Rates Contract size $ 1.20 = € 1.00 $ 1.25 = € 1.00 € 62,500 $ 1.00 = ¥ 100 $ 1.00 = ¥ 120 ¥ 12,500,000 The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using forward contracts

Answer: Find the strategy in the explanation.

Step-by-step explanation:

He should Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. This will generate an obligation of $1250000. After this, he should buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120.

He should sell €1m using 16 contracts at a forward rate of $1.25 per €1. Then he should purchase ¥150,000,000 using 12 contracts, at forward rate of $1.00 = ¥120.

Step-by-step explanation:

From the example Given,

Let recall the following,

A Japanese exporter has a = €1,000,000 receivable due in a year,

The spot exchange rates of 1 year forward rates contract size = $1.20 which is,

$1.20 = €1.00, $1.25 = €1.00 €62.500, $1.00 = ¥100 $ 1.00 = ¥ 120 ¥ 12,500, 000

One-year risk rates free is = i$ = 4.03%; i€ = 6.05% and i¥ = 1%

Therefore,

The strategy for using forward contracts is, at the rate of $1.25 per €1, he should sell €1,000,000 forward using 16 contracts. He should buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120.