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

Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Japan for 42,000,000. The purchase 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 JPY112/USD

The six month forward rate is JPY120/USD

CVT's forecast for 6-month spot rates is JPY110/USD

The budget rate, or the highest acceptable purchase price for this project, is $400,000 or 105/$

Current borrowing rate in Japan is 1%.

If CTV wants to hedge its cash flows by borrowing yen, how much should it borrow in JPY?

42,000,000

$42,420,000

42,420,000

unknown today

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