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Question 5 A Japanese firm, Sushu, imports grain from the United States. The cost of their latest shipment is $377 287. Payment is due in three months in dollars. Sushu has obtained the following exchange rates and interest rates from Wasabi Bank. Exchange Rates + Bid (S) Ask (¥/$) Spot exchange rates 105.85 106.35 3-month forward rates 105.66 106.02 Interest Rates Invest Borrow Japan 1.5% 1.9375% United States 3.25% 4% a) Describe the nature of your transaction risk. b) Determine the type of forward rate contract Shushu should take out and calculate the cost to the company of the import shipment in Yen, if they take out the forward cover. c) Sushu is considering a money market hedge to eliminate their transaction risk. Calculate the three-month cost of this strategy in Yen. d) Sushu can obtain finance from Wasabi Bank at the rate quoted in the table. If their supplier is offering a 0.5% discount for immediate payment, calculate the three-month cost to Sushu in Yen if they borrow and pay immediately. e) State which of the three strategies in b), c) or d) above should be adopted by Sushu and the reason for your choice.

Question 5 A Japanese firm, Sushu, imports grain from the United States. The cost of their latest shipment is $377 287. Payment is due in three months in dollars. Sushu has obtained the following exchange rates and interest rates from Wasabi Bank. Exchange Rates + Bid (S) Ask (¥/$) Spot exchange rates 105.85 106.35 3-month forward rates 105.66 106.02 Interest Rates Invest Borrow Japan 1.5% 1.9375% United States 3.25% 4% a) Describe the nature of your transaction risk. b) Determine the type of forward rate contract Shushu should take out and calculate the cost to the company of the import shipment in Yen, if they take out the forward cover. c) Sushu is considering a money market hedge to eliminate their transaction risk. Calculate the three-month cost of this strategy in Yen. d) Sushu can obtain finance from Wasabi Bank at the rate quoted in the table. If their supplier is offering a 0.5% discount for immediate payment, calculate the three-month cost to Sushu in Yen if they borrow and pay immediately. e) State which of the three strategies in b), c) or d) above should be adopted by Sushu and the reason for your choice.

International Financial Management
International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter10: Measuring Exposure To Exchange Rate Fluctuations
Section: Chapter Questions
Problem 1IEE
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Question 5 A Japanese firm, Sushu, imports grain from the United States. The cost of their latest shipment is $377 287. Payment is due in three months in dollars. Sushu has obtained the following exchange rates and interest rates from Wasabi Bank. Exchange Rates + Bid (S) Ask (¥/$) Spot exchange rates 105.85 106.35 3-month forward rates 105.66 106.02 Interest Rates Invest Borrow Japan 1.5% 1.9375% United States 3.25% 4% a) Describe the nature of your transaction risk. b) Determine the type of forward rate contract Shushu should take out and calculate the cost to the company of the import shipment in Yen, if they take out the forward cover. c) Sushu is considering a money market hedge to eliminate their transaction risk. Calculate the three-month cost of this strategy in Yen. d) Sushu can obtain finance from Wasabi Bank at the rate quoted in the table. If their supplier is offering a 0.5% discount for immediate payment, calculate the three-month cost to Sushu in Yen if they borrow and pay immediately. e) State which of the three strategies in b), c) or d) above should be adopted by Sushu and the reason for your choice.
Transcribed Image Text:Question 5 A Japanese firm, Sushu, imports grain from the United States. The cost of their latest shipment is $377 287. Payment is due in three months in dollars. Sushu has obtained the following exchange rates and interest rates from Wasabi Bank. Exchange Rates + Bid (S) Ask (¥/$) Spot exchange rates 105.85 106.35 3-month forward rates 105.66 106.02 Interest Rates Invest Borrow Japan 1.5% 1.9375% United States 3.25% 4% a) Describe the nature of your transaction risk. b) Determine the type of forward rate contract Shushu should take out and calculate the cost to the company of the import shipment in Yen, if they take out the forward cover. c) Sushu is considering a money market hedge to eliminate their transaction risk. Calculate the three-month cost of this strategy in Yen. d) Sushu can obtain finance from Wasabi Bank at the rate quoted in the table. If their supplier is offering a 0.5% discount for immediate payment, calculate the three-month cost to Sushu in Yen if they borrow and pay immediately. e) State which of the three strategies in b), c) or d) above should be adopted by Sushu and the reason for your choice.
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