CMA Study Group

Part 2 international finance

  • 1.  Part 2 international finance

    Posted 25 days ago
    Baljit Inc. purchased machinery from a Japanese firm and will have to pay ¥278,450,000 in 90 days. Baljit
    has three choices: (1) wait 90 days and purchase the Yen on the spot market on settlement date, (2) enter
    into a forward contract with a rate of ¥105.46/$ to buy the required Yen on the settlement date, or (3)
    purchase the Yen today on the spot market at a rate of ¥102.50/$. The risk-free rate is 6% in both Japan
    and the US. What is the cost today to Baljit of the forward contract choice?
    $2,640,338
    $274,334,975
    $2,676,439
    $2,601,318- correct answer

    Answer

    Correct. The cost of the forward contract is ¥278,450,000 ÷ ¥105.46/$ = $2,640,338 ÷ (1 + .06 × 90 ÷ 360)
    = $2,601,318.

    Can some one help me to understand this calculation  "(1 + .06 × 90 ÷ 360)"
    thanks

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    Aaditya
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  • 2.  RE: Part 2 international finance

    Posted 25 days ago
    The formula is 1 + risk rate multiplied by forward contract days 90 days out of 360 days.

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    Murali Ravikumar
    Supervisor
    Chennai
    India
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  • 3.  RE: Part 2 international finance

    Posted 24 days ago
    Thanks murali

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    Aaditya Narayanan Chakravarthy Padmanabhan
    Analyst
    Quincy MA
    United States
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