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Problem: Bridgestone, a Japanese-based company, receives recurring income in USD of about USD 5 billion per year. The current exchange rate is ¥120/USD. The interest rates in Yen and USD are respectively 0.5% and 3.5%, leading to a forward price of ¥116.52/USD. Bridgestone works in a low-margin industry.
Question: The forward price (in ¥/USD, i.e. the amount of Yen that 1 USD buys) is below the1currentspot price. Explain intuitively why that is the case. Discuss using 'uncovered interest rate parity' whether the forward price being lower than the current spot price constitutes an additional hedging cost (or benefit) to the firm.
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