In 30 days Radio Shack must pay yen to a Japanese supplier for a shipment of radios arriving then. Radio Shack can sell each radio for $100 and must pay its supplier ¥9,000 per radio; its profit depends on the dollar/ yen exchange rate. The current spot exchange rate, E$/¥ = $0.0105 per yen. Radio Shack will not have the funds to pay the supplier until the radios arrive and are sold. Over the next 30 days, the dollar may depreciate to $0.0115 per yen, and Radio Shack may incur a loss. Describe how Radio Shack can use a forward exchange deal to insure against the possibility that the depreciation of U.S. currency will turn a profitable importing deal into a loss.
In 30 days Radio Shack must pay yen to a Japanese supplier for a shipment of radios arriving then. Radio Shack can sell each radio for $100 and must pay its supplier ¥9,000 per radio; its profit depends on the dollar/ yen exchange rate. The current spot exchange rate, E$/¥ = $0.0105 per yen. Radio Shack will not have the funds to pay the supplier until the radios arrive and are sold. Over the next 30 days, the dollar may depreciate to $0.0115 per yen, and Radio Shack may incur a loss. Describe how Radio Shack can use a forward exchange deal to insure against the possibility that the depreciation of U.S. currency will turn a profitable importing deal into a loss.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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In 30 days Radio Shack must pay yen to a Japanese supplier for a shipment of radios arriving then. Radio Shack can sell each radio for $100 and must pay its supplier ¥9,000 per radio; its profit depends on the dollar/ yen exchange rate. The current spot exchange rate, E$/¥ = $0.0105 per yen. Radio Shack will not have the funds to pay the supplier until the radios arrive and are sold. Over the next 30 days, the dollar may
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