A business executive needs to pay for a major product from Japan in two months (60 days). The ForEx (short for foreign exchange) spot rate is USD1 = JPY 110 (Japanese yen) and the 60 day forward rate is USD1 = JPY 111. What does this mean? The US dollar is appreciating. He should wait 60 days because the currency will be cheaper then. The US dollar is depreciating. He should wait 60 days because the currency will be cheaper then. The US executive can buy JPY today at 110 yen per dollar, or buy a forward contract that locks his price at 111 yen. This gives him assurance today regarding the price he will have to pay when payment is due. The US executive can buy JPY today at 110 yen per dollar, or wait for 60 days and buy it at 111 yen. It's his choice.
A business executive needs to pay for a major product from Japan in two months (60 days). The ForEx (short for foreign exchange) spot rate is USD1 = JPY 110 (Japanese yen) and the 60 day forward rate is USD1 = JPY 111. What does this mean? The US dollar is appreciating. He should wait 60 days because the currency will be cheaper then. The US dollar is depreciating. He should wait 60 days because the currency will be cheaper then. The US executive can buy JPY today at 110 yen per dollar, or buy a forward contract that locks his price at 111 yen. This gives him assurance today regarding the price he will have to pay when payment is due. The US executive can buy JPY today at 110 yen per dollar, or wait for 60 days and buy it at 111 yen. It's his choice.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A business executive needs to pay for a major product from Japan in two months (60
days). The ForEx (short for foreign exchange) spot rate is USD1 = JPY 110 (Japanese
yen) and the 60 day forward rate is USD1 = JPY 111. What does this mean?
The US dollar is appreciating. He should wait 60 days because the currency will
be cheaper then.
The US dollar is depreciating. He should wait 60 days because the currency will|
be cheaper then.
The US executive can buy JPY today at 110 yen per dollar, or buy a forward
contract that locks his price at 111 yen. This gives him assurance today regarding
the price he will have to pay when payment is due.
The US executive can buy JPY today at 110 yen per dollar, or wait for 60 days
and buy it at 111 yen. It's his choice.
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