Suppose a US firm has just bought an asset from a Japanese firm for ¥500 million, due in one year. The spot exchange rate for Japanese yen is ¥122/$ and the one-year forward exchange rate for Japanese yen is ¥130/$. The one-year interest rate is 5% in the US and 12% in Japan. Calculate today's dollar cost of meeting this obligation using a money market hedge.

$ 3659250

Explanation:

Current value of exposure = 500 * ( 1 / 1 + 12% )

= 446428571.4

As 1 $ = 122 yen

So current value using a money market hedge = 446428571.4 * spot exchange rate

= 446428571.4 * ( 1 / 122 )

= $ 3659250

the correct answer is:

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