Fibertech Corporation just received an invoice from a Japanese manufacturer. The invoice states that Fibertech must pay the Japanese company 5,500,000 yen (the Japanese currency) in 90 days. If Fibertech pays the bill today, it needs $500,000 because each yen currently costs $0.09091 (i.e., $1 can purchase 11 yen). Fibertech is considering waiting to pay until the bill is due because to pay today it would have to borrow the needed funds at a very high interest rate. In 90 days, the firm expects to have collected funds from outstanding sales that will be more than sufficient to pay the Japanese manufacturer.
a. Give some reasons Fibertech might want to pay the bill today rather than wait for 90 days. Give some reasons for not paying the bill until it is due.
b. Suppose Fibertech can obtain a futures contract for delivery of 5,500,000 yen in 90 days, but it will cost $0.095 for each yen at delivery. In U.S. dollars, how much will Fibertech have to pay to settle its bill in 90 days with this contract?
c. Assume that Fibertech chooses not to take the futures contract described in part (b). In U.S. dollars, how much will the company have to pay if the exchange rate in 90 days is $0.10 per yen? If it is $0.085 per yen?
d. What primary benefit would Fibertech derive from entering into the futures contract?

  • CreatedNovember 24, 2014
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