Halliburton buys construction equipment

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Reference no: EM132044651

Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥220 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is 98 yen = $ 1. The current interest rate on one-year U.S. Treasury bills is 6%, and on one-year Japanese government bonds the interest rate is 4%.

a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need $2158555.73 to exchange today in order to have ¥220 million in one year. (Round your response to the nearest dollar.)

b. If Halliburton enters a forward contract, agreeing to buy ¥220 million in one year at an exchange rate of ¥96=$1, it will need $2161949.69 today if it plans to invest the dollars at the U.S. interest rate of 6%. (Round your response to the nearest dollar.)

c. If Halliburton invests today at the U.S. interest rate of 6%, without entering into any other type of contract, does the firm know how many dollars it needs today to fulfill its equipment contract in one year?

A. No, it depends on the exchange rate at the end of the contract.

B. No, but it takes the risk.

C. Yes, it would need $2,161,950.

Both A and B are correct. Your answer is correct.

d. Which method(s) described in (a) through (c) provide(s) a hedge against exchange-rate risk? Which do(es) not? Which method is Halliburton likely to prefer? A. Hedges are provided by (a) and (c) but not (b), and Halliburton prefers (c) because it costs less. B.A hedge is provided by (a) but not (b) and (c), and thus Halliburton only prefers (a). C. Hedges are provided by (a) and (b) but not (c), and Halliburton prefers (a) because it costs less. Your answer is correct.

D. Hedges are provided by (a) and (b) but not (c), and Halliburton prefers (b) because it costs less.

e. In order for the results in (a) and (b) to be equivalent, the forward contract exchange rate in (b) has to be ¥____________per dollar. (Round your response to two decimalplaces.)

Reference no: EM132044651

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