Question

Matson Lines which operates the shipping between the US and Hawaii under the Jones Act has ordered three small oil tankers from Mitsubishi Heavy Industries in Japan to be delivered in 3 years, 5 years and 7 years respectively. The cost of the three ships are respectively Yen 5 billion, Yen 5.5 billion and Yen 6.5 billion. The current Yen/$ exchange rate is Yen107 = 1US$. Matson is a dollar-based organization and wants to fix the 107 Yen/$ rate in terms of both its Yen transaction and translation exposure. How should it do this with the minimum cash outlay?

Answer 1

Answer & Explanation:

Matson can fix the 107 Yen/$ rate in terms of both its Yen transaction and translation exposure by:

- forward contracts for currency to fix exchange rate

- future contracts for commodity to fix selling price