Your company expects to receive 5000000 Japanese yen 60 days

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? Briefly discuss. For calculations show ALL your steps included calculator/Excel keystrokes and/or formulas

Solution

USA Company will receive Yen and hence long Yen but the company is in USA and ultimately it had to convert proceeds in USD. Hence short yen forward and long USD.

Forward rate = .0095 - when the contract is entered

After 60 days spot rate is .0090

Payoff = spot rate - forward rate

= .0090 - .0095 = - .0005

Negative sign means profit to the short position holder. Hence US company profit from this hedge.

5,000,000 * .0095 = 47,500$ - convert at forward rate.

5,000,000 * .0090 = 45,000$ - convert at spot rate.

Profit for US company is = 2500 $ by entering in to forward contract.