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Exporting Conversion Problems

How much did the company make or lose ?

Use the following information to answer questions 1-2. The current exchange rate between the US dollar and the Japanese yen is $1 = 102.690 yen. The one month forward rate is $1 = 102.505 yen. The two month forward rate is $1 = 102.349 yen. The three month forward rate is $1 = 102.207 yen.

  1. How would a US exporter which receives 395,000 yen in 30 days contract in the forward market to pay the future invoice? How many dollars would the exporter receive?
    How much did the company make or lose on the transaction compared to the spot market? Explain your answer.
  2. How would a Japanese exporter which receives $37,500 in 30 days contract in the forward market to convert to yen? How many yen would the exporter receive? How much did the company make or lose on the transaction compared to the spot market?
    Explain your answer.

SAMPLE ANSWER:

The Japanese exporter is long Dollar and short Yen. It is short Yen because it will need to purchase them in the near future. The Japanese exporter can wait one month and see what happens in the currency markets or enter into a currency forward contract. To accomplish this, the Japanese exporter can short the forward contract, or Dollar, and go long the Yen.
If the exporter goes in a forwards contract for one month, it allows the exporter to buy dollars and sell euros.

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