Question: Problem 5 (8 points) Today is February 26 and one of your clients, a US company, expects to receive 50 million Japanese yen at the

Problem 5 (8 points) Today is February 26 and one of

Problem 5 (8 points) Today is February 26 and one of your clients, a US company, expects to receive 50 million Japanese yen at the end of July. Yen futures contracts traded on the CME have a size of 12.5 million yen. The June delivery contract currently trades at 03680:]: per yen and the contract with September delivery trades at 0.88000: per yen. (a) (2 points) Describe how you would advise the company to hedge its exchange rate risk, i.e. describe what action it should take today as well as when the yen arrive at the end of July. (b) (4 points) Suppose at the end of July the exchange rate is 0.8200 a: per yen and the futures price is 0.8250c per yen. What is your effective exchange rate after hedging? What is your total gain or loss from your futures position? (c) {2 points) Are you better or worse off if the basis strengthens over the life of the hedge? Explain briey

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