Solutions to lecture 2 related questions

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PS2 S – Solutions to lecture 2 related questions

International Financial Strategy (Queen Mary University of London)

Studocu is not sponsored or endorsed by any college or university

PS2 S – Solutions to lecture 2 related questions

International Financial Strategy (Queen Mary University of London)

Downloaded by Namik Abramov (abramovnamik@gmail.com)

lOMoARcPSD|15008662

PROBLEM SET 2

1. Proctor and Gamble’s affiliate in India, P&G India, procures much of its toiletries product

line from a Japanese company. Because of the shortage of working capital in India, payment

terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge a 8.5

million Japanese yen payable. Although options are not available on the Indian rupee (Rs),

forward rates are available against the yen. Additionally, a common practice in India is for

companies like P&G India to work with a currency agent who will, in this case, lock in the

current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and

interest rate data, recommend a hedging strategy.

Assumptions

Values

180-day account payable, Japanese yen (¥)

8,500,000

Spot rate (¥/$)

120.60

Spot rate, rupees/dollar (Rs/$)

47.75

Implied (calculated) spot rate (¥/Rs)

2.5257

(120.60 / 47.75)

180-day forward rate (¥/Rs)

2.4000

Expected spot rate in 180 days (¥/Rs)

2.6000

180-day Indian rupee investing rate per annum

8.000%

lOMoARcPSD|15008662

180-day Japanese yen investing rate per annum

1.500%

Currency agent’s exchange rate fee

4.850%

3,365,464.34

3,541,666.67

2. Buy Japanese yen forward 180 days