Question: Central Valley Transit Inc. (CVT) has just signed a contract to sell light rail cars to a customer in Japan for 42,000,000. The sales was

  1. Central Valley Transit Inc. (CVT) has just signed a contract to sell light rail cars to a customer in Japan for 42,000,000. The sales was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Japanese yen rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

    The spot exchange rate is JPY115/USD

    The six month forward rate is JPY112/USD

    CVT's forecast for 6-month spot rates is JPY120/USD

    The budget rate, or the lowest acceptable sales price for this project, is $345,000 or 121.74/$

    Current lending rate in the U.S. is 4.15%.

    If CVT chooses to hedge its transaction exposure in the forward market at the available forward rate, in 6 months it will receive:

    42,000,000

    $350,665

    $375,000.

    $365,217

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