Answer:
He should sell €1m using 16 contracts at a forward rate of $1.25 per €1. Then he should purchase ¥150,000,000 using 12 contracts, at forward rate of $1.00 = ¥120.
Explanation:
From the example Given,
Let recall the following,
A Japanese exporter has a = €1,000,000 receivable due in a year,
The spot exchange rates of 1 year forward rates contract size =$1.20 which is,
$1.20= €1.00, $1.25= €1.00 €62.500, $1.00 = ¥100 $ 1.00 = ¥ 120 ¥ 12,500, 000
One-year risk rates free is =i$ = 4.03%; i€ = 6.05% and i¥ = 1%
Therefore,
The strategy for using forward contracts is, at the rate of $1.25 per €1, he should sell €1,000,000 forward using 16 contracts. He should buy ¥150,000,000 forward using 12 contracts, at the forward rate of $1.00 = ¥120.