Question

Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥270 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥102 = $1. The current interest rate on one-year U.S. Treasury bills is 8%, and on one-year Japanese government bonds the interest rate 6% a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one year, it will need S (Round your response to the nearest dollar.) to exchange today in order to have ¥270 million in one year. one year at an exchange rate of ¥100 = $1, it will need $today if it plans to invest the b. If Halliburton enters a forward contract, agreeing to buy ¥270 million dollars at the U.S. interest rate of 8%. (Round your response to the nearest dollar.) c. If Halliburton invests today at the U.S. interest rate of 8%, without entering into any other type of contract, does the firm know how many dollars it needs today to fulfill its equipment contract in one year? O A. No, it depends on the exchange rate at the end of the contract. O B. No, but it takes the risk. O C. Yes, it would need $2,500,000. O D. Both A and B are correct. d. Which method(s) described in (a) through (c) provide(s) a hedge against exchange-rate risk? Which do(es) not? Which method is Halliburton likely to prefer? O A. Hedges are provided by (a) and (b) but not (c), and Halliburton prefers (b) because it costs less. O B. A hedge is provided by (a) but not (b) and (c), and thus Halliburton only prefers (a). O C. Hedges are provided by (a) and (c) but not (b), and Halliburton prefers (c) because it costs less. O D. Hedges are provided by (a) and (b) but not (c), and Halliburton prefers (a) because it costs less e. In order for the results in (a) and (b) to be equivalent, the forward contract exchange rate in (b) has to be ¥per dollar. (Round your response to two decimal places.)

Answer 1

m Haliburton buys komatsu Ans Suppote that the U.s euipment rom the japanese irm priea 270 million. The Current exchange Constructiom 102 2L Treasur bills îs 81. and Japonede goremment at a rate bmds the interest rate is 6,. solution: Japanese one yeor Gorenment 8nd jnieresh reteor) 26% per ear Treasury bll rate 2 yen payables ateriyeor Pa 270 million PYen payableu today jjinvest atír) 2 270 254.72 million PVVen payables torelay in$ z Current x Pr oen payable todoy TaJe 254.12 L02 2.491 2.50 million 100 2 $1,payables 270 million 2.7 mili'om Payable Reaw red 27O payables today 2.7 e2.5million Halliburten invests tedos into any other type Comat, atthe Us înterestrate enrering 87ithaut Japaneseyen considered tobe the dameshic CuTren oein uTTeny,then expected 1 year 102x .06 Hhe UsDthe 2t00.1yen$ Boraend euchaagerale ables Regured i yeor later 270/100-11 <2.9 2.7 millioo

Pr payables Fodoy 2.7/1.08 2.5 millio) Iherelore, valuu needed Jrom inves tment taday enti rely dapendent Thereloe, The optien A is Correch TON n Iyear spot ex charsde ) dThe hede is proided by part @ and partCb) but not by partie), and Halliburten prefers (aj because Therer,optian D is corech. As-the empany would prefer the maney merket hedge is cheaper. in part Ca) a In oTdes Jas the results inaj and (b) to be valent the Rorward conhact Yalue o payables achange Tede Yea later - $2.7 One Resuired oruward exchange 270 2.7 100 yen1s