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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
