A Japanese EXPORTER has a €1,000,000 receivable due in one year . Spot and forward exchange rate data is given in the table: 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 contract s that will hedge exchange rate risk.
A.
Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to yen at spot, receive ¥116,504,854.
B.
Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000 forward using 11.52 contracts, at the forward rate of $1.00 = ¥120.
C.
Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120.