Forward to avoid exchange rate risk

Assignment Help Financial Management

Reference no: EM132044763

Jacksonville Corp. is a U.S. based firm that needs $500,000. It has no business in Japan but is considering one year financing with Japanese yen, because the annual interest rate would be 5 percent versus 9 percent in the United States. Assume that interest rate parity exists.

1. Can Jacksonville benefit from borrowing Japanese yen and simultaneously purchasing yen one year forward to avoid exchange rate risk? Explain.

2. Assume that Jacksonville does not cover its exposure and uses the forward rate to forecast the future spot rate. Determine the expected effective financing rate. Should Jacksonville finance with Japanese yen? Explain.

3. Assume that Jacksonville does not cover its exposure and expects that the Japanese yen will appreciate by either 5 percent, 3 percent, or 2 percent, and with equal probability of each occurrence. Use this information to determine the probability distribution of the effective financing rate. Should Jacksonville finance with Japanese yen? Explain.

Reference no: EM132044763

Questions Cloud

Recommend the better package for organizational decisions : Prepare and execute an extensive analysis and use the appropriate tools for assessment to recommend the better package for organizational decisions.

Discuss the multidisciplinary approach : Your ability to use the multidisciplinary approach depends on your mastery of the core set of capabilities described in the introduction to Unit 4.

What are pros and cons of financing option of floorplanning : How would you put a value on the defensive nature of this acquisition? What are the pros and cons of the financing option of floorplanning.

How do you arrive at earning per share in the denominator : On December 1, the company issued and additional 6000 shares. How do you arrive at earning per share in the denominator

Forward to avoid exchange rate risk : Can Jacksonville benefit from borrowing Japanese yen and simultaneously purchasing yen one year forward to avoid exchange rate risk?

Using forward hedge or money market hedge : It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge?

What additional information would you have : Reflecting on the assessments that you completed in the earlier units, are there any personal values, biases, or weaknesses that might impact.

How the two types of groups selected are similar : Discuss how the two types of groups selected are similar or different based upon the topic of the group and role of the facilitator.

Calculate the depletion per unit : Total Cost: $1,200,000; Residual Value: $200,000; Total Units: 5,000,000. Using the following figures, calculate the depletion per unit

User Account

All Pages