A U.S. firm Royal British Cookies Company ("RBC") expects to receive 50 million Japanese yen (JPY) from its Japanese customer on Nov. 1, 2020.  Today is May 1, 2020, and the JPY/USD spot rate is currently $0.008. To mitigate the risk of change in the value of the JPY receivable, the manager of RBC has decided to use currency forward contracts.  The Bank of America ("BoA") has provided the following quotations:    
            JPY/USD 6-month forward, bid price: $0.0072          
            JPY/USD 6-month forward, ask price: $0.0075           

Answer questions 

A. If RBC entered into the forward contract with BoA, what would be the value of its JPY receivable in US dollar on Nov. 1? 

B. Suppose on Nov. 1, JPY/USD spot rate is $0.0068. Had RBC not used the forward contract, (i) what would be the dollar value of its JPY receivable on Nov. 1?  Additionally, (ii) determine the gain or loss due to the change in the spot price between May 1 and Nov. 1. 

 

Answer rating: 100% (QA)

A If RBC entered into the forward contract with BoA the exchange rate for the JPYUSD on Nov 1 would be fixed at the rate agreed upon in the forward co... View the full answer