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Michelangelo Felix
Management 491-002
Final Exam

FINAL EXAMINATION INTERNATIONAL BUSINESS 491-002 Due Monday May 13, 2013
This exam has been handed out in class and posted on the class website on April 19th, 2013 and is due back as an e-mail attachment in Microsoft Word or pdf format or by fax (914-923-1416) by 11:55PM on Monday, May 13, 2013.

This is an open book test and you may discuss an answer with other students. But you must submit your own answer in your own words! Further any information taken from the text or other sources must be paraphrased.

That is, it also must be put into your own words. No quotes! Warning! Common or group answers are not accepted and will receive zero credit.

Read The Questions Carefully and Be Sure to Address All the Points Raised Answer All 8 questions (100 points) Short Answer 1-7 [10 points each and each about 1/2 – 3⁄4 page double-spaced]:

1.If the spot rate for Japanese Yen is 85 Yen equals 1 US \$, and the annual Yen interest rate on fixed rate one-year deposits of Yen is 0.25% and for US\$ is 1.5%, what is the nine-month forward rate for one dollar in terms of Yen? Assuming the same interest rates, what is the 18-month forward rate for one Yen in dollars? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the Yen get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations in Japan compared to the US?

S = \$1 USD = 85 JPY
Rd = annual Yen interest rate = 0.25%
Rf = annual USD interest rate = 1.5%
9 months = 270/360
F = Forward Rate

F = S * (1 + Rd * 270/360) / (1 + Rf * 270/360)
F = S * (1 + 1.5% * 270/360) / (1 + 0.25% * 270/360)
F = 86.0598 YEN

F = S * (1 + Rd * 270/360) / (1 + Rf * 270/360)
F = S * (1 + 0.25% * 540/720) / (1 + 1.5% * 540/720)
F = 0.009876 USD
This is the direct rate. Comparing the forward rate of 86.05 Yen to 1 USD, the Yen would be weaker and the USD would get stronger. This indicates that the Yen seems to inflate against the USD making the dollar stronger.

2. On January 2d, 2013, Canon expects to ship 900,000 all-in-one fax, printers, and copy machines from its plant in Japan to the US, which it will sell through US dealers on 270- day terms at \$85 each. So Canon will receive payment from its dealers on September 28th, 2013. Assuming that Canon needs to cover its expenses in Japan and thus wants to hedge its Yen/US\$ exposure using a forward contract with a Japanese bank in the US, what is the minimum amount of Yen they should receive on September 28th, 2013 given the nine month forward rate for one US dollar in terms of Yen that you calculated in problem one? What are two other ways Canon might hedge their Yen/US\$ exposure?

900,000 Shipments
270 Days
\$85 Each

900,000 * \$85 = \$76,500,000
\$76,500,000 / 86.0598 YEN = 888916.7765 YEN
A hedge can be defined as making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

One of the ways Canon can hedge their Yen/USD exposure is by using a forward exchange contract. This will have a fixed exchange rate in place which they can use. This will ensure that they will not lose profit on their shipments due to the spot exchange rate. Another option is to use the Currency swap system, which will allow Canon to convert Yens to USD if the supplier is in the United States. There is also a contract place to receive payments from USD to Yen if needed to pay suppliers.

3. In his book Manias, Panics and Crashes...