Foreign exchange derivatives and managing exchange risk, Business Economics

Assume that Deborah Electronics expects a delivery of Fujitsu laptops in a month from a Japanese supplier. Each laptop sells at $1000 in the retail market whereas the import cost is ¥90,000 per unit. The spot exchange rate today is ¥95.238 per US dollar, but in 30 days the dollar is expected to depreciate to ¥86.956. Deborah Electronics can either (i) wait for a month and pay the supplier at the expected spot exchange rate or (ii) enter a 30-day forward exchange deal with Bank of America to buy yen forward at ¥92.308 per dollar. Calculate profit (or loss) per laptop under each scenario and suggest Deborah Electronics the better option.

# A non-deliverable forward contract (NDF) is a new type of forward contract. It involves no actual exchange of currencies at future date, rather one party to the agreement makes a payment to the other party based on the actual exchange rate on the settlement date. For example, Jackson, Inc., an MNC based in Wyoming, determined as of April 1 that it would need 100 million Chilean pesos to purchase supplies on July 1. It negotiated an NDF (Non-deliverable Forward Contract) with a local bank as follows.

Buy 100 million pesos.

Settlement date: July 1.

Reference index: Chilean peso's closing exchange rate (in dollars) quoted by Chilean central bank in 90 days.

The current spot exchange rate of peso: $0.0020.


Suppose that the peso appreciated to $0.0023 on July 1. Estimate the value of the NDF position at the settlement date showing the differential payment involved. How do you evaluate the case should the peso depreciate to $0.0018 on July 1. Show that regardless of future peso exchange rate changes Jackson Inc. is hedged against the exchange risk.

Posted Date: 2/21/2013 1:54:31 AM | Location : United States

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