You are assigned the duty of ensuring the availability of 100,000 yen for the payment that is scheduled for next month. Considering that your company possesses only U.S. dollars, identify the spot and forward exchange rates. What are the factors that affect your decision of utilizing spot versus forward exchange rates? Which one would you choose? How many dollars do you have to spend to acquire the amount of yen required?
Since I possess U.S. dollars I would compare them to the yen on the chart above. The spot rates for Monday and Friday respectively are 110.68 and 111.20 yen for each dollar. The one month forward rate is 110.52 and 111.05 for each dollar. Since the yen is dropping in value (less yen for each dollar in one month's time) I would purchase the spot rate on Friday and hold onto the yen for 28 days with the rationale being the yen would not only decrease in price but decrease beyond the forward rate price.
By doing this I would be able to purchase 100,000 yen for $899.28 as compared to $900.50 if I purchased at the forward rate.
However, someone who is a gambler might hold onto the U.S. dollars with the hope that the spot rate in 28 days time will yield 100,000 yen for fewer U.S. dollars. However, as Figure 1.2 illustrates it is likely that the yen will continue to fall throughout the end of the third quarter and through the entire fourth quarter assuming it follows the same trend. This trend is highlighted by a peak early in the year and a severe decline into May. The same rise is present in the third quarter and as Figure 1.2 shows it is already beginning its' decline. It is likely that other...