A US automotive firm wants to build a new factory in Japan. Information relating to this proposed investment is given below
Construction payment due in six-months (A/P, quetzals) 12,000,000
Present spot rate (Yen/$) 8.0000
Six-month forward rate (Yen/$) 8.2000
Japan six-month interest rate (per annum) 16.000%
U.S. dollar six-month interest rate (per annum) 7.000%
Weighted average cost of capital (WACC) 21.000%
The treasury manager, concerned about the Japanese economy, wonders about the hedging possibilities to minimize its foreign exchange risk. The manager’s own forecast is as follows:
Expected spot rate in six-months (quetzals/$):
Highest expected rate 9.0000
Expected rate 8.3000
Lowest expected rate 7.5000
Show the realistic alternatives are available to this company for making payment? State whether the outcomes are risky or certain. 8 marks
Which method would you select and why? 2 marks