Purchasing yen one year forward to avoid exchange rate risk

Assignment Help Financial Management

Reference no: EM132038449

Jacksonville Corp. is a U.S. based firm that needs $500,000. It has no business in Japan but is considering one year financing with Japanese yen, because the annual interest rate would be 5 percent versus 9 percent in the United States. Assume that interest rate parity exists.

1. Can Jacksonville benefit from borrowing Japanese yen and simultaneously purchasing yen one year forward to avoid exchange rate risk? Explain.

2. Assume that Jacksonville does not cover its exposure and uses the forward rate to forecast the future spot rate. Determine the expected effective financing rate. Should Jacksonville finance with Japanese yen? Explain.

3. Assume that Jacksonville does not cover its exposure and expects that the Japanese yen will appreciate by either 5 percent, 3 percent, or 2 percent, and with equal probability of each occurrence. Use this information to determine the probability distribution of the effective financing rate. Should Jacksonville finance with Japanese yen? Explain.

Reference no: EM132038449

Questions Cloud

Benefitting from the above rates : What nominal (riskless) rate of return for $ investments can an US investor earn by benefitting from the above rates?

Implements money market hedge : Determine the amount of dollars that Narto Co. will receive at the end of one year if it implements a money market hedge.

Conduct a portfolio analysis using jensen alpha : Conduct a portfolio analysis using Jensen alpha (Equation 13.6) to compare market performance and risk. Use market data based on Standard and Poors 500.

Speculation over the five-day period : Reagan Bank has the capacity to borrow either NZ$10 million or $5,200,000 million. If Reagan Bank's forecast if correct, what will its dollar profit

Purchasing yen one year forward to avoid exchange rate risk : Can Jacksonville benefit from borrowing Japanese yen and simultaneously purchasing yen one year forward to avoid exchange rate risk? Explain.

Currency lending rate borrowing rate dollars : Reagan Bank believes the New Zealand dollar will appreciate over the next five days from $0.45 to $.50. The following annual interest rates apply:

Convert to pesos to cover the operating expenses : Lakeland is considering borrowing dollars, which it would convert to pesos to cover the operating expenses.

Eps before and after the change in capital structure : Calculate the EPS before and after the change in capital structure and indicate changes in EPS.

Expected annual cost of financing with singapore dollars : Determine the expected annual cost of financing with Singapore dollars.

User Account

All Pages