Question

On March, A Japanese company expected to pay 1 million of USD in July. The current spot exchange rate is 130 yen per dollar, September futures price is currently 138 yen per dollar. At the end of July, the spot exchange rate is 132 yen per dollar and September futures price is 135 yen per dollar. By hedging with the September futures contract, what is the net exchange rate after hedging? How much the Japanese company will pay in terms of yen after hedging?

Answer 1

By hedging with the September futures contract, the net exchange rate after hedging is 135 yen per dollar. The Japanese company will pay 135 million yen in terms of yen after hedging.

Step-by-step explanation:

To hedge with the September futures contract, the Japanese company will sell its dollars at the futures price of 138 yen per dollar. This means that they will secure a rate of 138 yen per dollar for their 1 million USD. At the end of July, when the spot exchange rate is 132 yen per dollar and the September futures price is 135 yen per dollar, the Japanese company will buy dollars at the spot rate of 132 yen per dollar. By hedging with the futures contract, the net exchange rate after hedging is 135 yen per dollar, which is the September futures price.

After hedging, the Japanese company will pay 1 million USD multiplied by the net exchange rate of 135 yen per dollar. Therefore, the Japanese company will pay 135 million yen in terms of yen after hedging.