17 Jan

An Australian organization has a ¥35,000,000 account payable in 3 months

by jagguarpaw On: Finance - 0 Comment

Question: An Australian organization has a ¥35,000,000 account…

An Australian organization has a ¥35,000,000 account payable in 3 months. The current Japanese yen (¥)/Australian Dollar (A$) spot exchange rate is ¥87.35/A$. The organization expects the spot rate in 3 months to be ¥80.45/A$. The 3-month forward exchange rate is ¥84.95/A$. The Australian Dollar (A$) 3-month borrowing rate is 4.00% per annum and the Australian Dollar (A$) 3-month investment rate is 6.00% per annum. The Japanese yen (¥) 3-month borrowing rate is 8.00% per annum and the Japanese yen (¥) 3-month investment rate is 4.00% per annum. The organization’s weighted average cost of capital is 9.70% per annum. The organization is considering three hedge positions: remaining unhedged, forward market hedge and money market hedge. Which of these hedge positions should the organization adopt?

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