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# Your firm (an Australian firm) makes a sale to a

Your firm (an Australian firm) makes a sale to a Japanese customer. The sale price is 200 million Japanese Yen payable in exactly three months from today. The current exchange rate is AUD/JPY = 90 (i.e., 1 Australian Dollar (AUD) is worth 90 Japanese Yen (JPY)). The current interest rates in Australia and Japan are 3% p.a. and 0.5% p.a., respectively.

Given this information, please answer the following questions. Please label your answers according to parts.

(a) Given that Australian Dollar is the domestic currency, what is the direct quote of the exchange rate between Australian Dollar and Japanese Yen ? Please round the final answer to five decimal places.

(b) What is the theoretical current forward exchange rate quoted directly in terms of Australian Dollar (i.e. JPY/AUD) for delivery three months from today ? Show your input to the formula to arrive at the final answer. Please round the final answer to five decimal places.

(c) How can the firm take advantage of any decreases in the exchange rate and also ensure that it receives at least Australian $2 million ? (Hint: Which derivative instrument can be used to achieve this objective?)

(d) Ignoring the cost of the derivative instrument to be used in part (c), what would be the outcome from hedging if the spot exchange rate in 3 month’s time is (i) AUD/JPY=150 and (ii) AUD/JPY = 50?

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