Suppose Ace International Company decides at t+18 to use a six-month contract to hedge the t + 24 receipt of yen from Kensui Incorporated. Six-month interest rates (annualized) at t + 18 are 5.9% in dollars and 2.1% in yen
The 6 month forward rate at time t + 18 is ¥128.58. With this hedge in place, what fixed dollar amount would Ace have paid and received at time t + 24?
What will be an ideal response?
Answer: Ace will pay out $2.9 million (0.059/2 x $100,000,000) and receive $647,056 (0.013/2 x 12,800,000 x 1/128.58)
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