The Dutch manufacturer Cloghopper has the following jpy commitments:

• A/R of jpy 1,000,000 for thirty days.

• A/R of jpy 500,000 for ninety days.

• Sales contract (twelve months) of jpy 30,000,000.

• A forward sales contract of jpy 500,000 for ninety days.

• A deposit that at maturity, in three months, pays jpy 500,000.

• A loan for which Cloghopper will owe jpy 8,000,000 in six months.

• A/P of jpy 1,000,000 for thirty days.

• A forward sales contract for jpy 10,000,000 for twelve months.

• A/P of jpy 3,000,000 for six months.

(a) What is Cloghopper's net exposure for each maturity?

(b) How would Cloghopper hedge the exposure for each maturity on the forward market?

(c) Assume that the interest rate is 5 percent (compound, per annum) for all maturities and that this rate will remain 5 percent with certainty for the next twelve months. Also, ignore bid-ask spreads in the money market. How would the company hedge its exposure on the spot market and the jpy money market? Describe all money-market transactions in detail.

(d) If the interest rate is 5 percent (compound, per annum) for all maturities and will remain 5 percent with certainty for the next twelve months, how would the company hedge its exposure on the forward market if only one forward contract is used?

(e) Assume that Cloghopper prefers to use traded options rather than forward contracts. The option contracts are not divisible, have a life of either 90, 180, 270, or 360 days, and for each maturity the face value of a contract is jpy 1,000,000. How could Cloghopper hedge its exposure? Do the options offer a perfect hedge for each maturity?

(f) Drop the assumption of a flat and constant term structure. If Cloghopper wants to hedge its exchange rate exposure using one forward contract and its interest rate exposure using FRA contracts, how would the analysis of parts (c) and (d) be affected? A verbal discussion suffices.

(g) The term structure is flat right now (at 5 percent p.a., compound), but is uncertain in the future. Consider the spot hedge of part (c). If, instead of FRAs, duration is used to eliminate the interest risk, how should Cloghopper proceed?