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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