Mendy's, a Canadian company, sells frozen food to Japan. Every month Mendy's receives a payment of JPY 15,000,000. The exchange rate is .01 CAD/JPY. The volatility (i.e., standard deviation) of the CAD/JPY exchange rate is .002. Provide a range for Mendy's exposure, measured in CAD? Without using futures, options, or a money market hedge, how would you recommend Mendy's to reduce its FX exposure?
Answered by Expert Tutors
JPY XX,XXX,000
0.XX x 15,XXX,XXX = CAD 150,000
0.XXX XXXXXXXX in rate = X.XXX
X.002 XXXXXXXX in rate = X.XXX
0.012 x XX,000,000 = XXX 180,000
0.008 x XX,000,XXX = XXX XXX,000
XXX,XXX - XXX,000 = 60,XXX
XXX range for Mendy's XXXXXXXX XX CAD 60,000
Mendy's could use other XXXXXXXXXX XXXX XX risk sharing, diversification, XXXXXXXX XXXXXXX (grouping XXXXXXXX XX XXXXXX risk), or using overseas XXXXX to reduce FX exposure.
Comments (XX)
could you XXXXXX XXXXXXX explain the XXXXXXXXXX?
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could you please further XXXXXXX XXX strategies?
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and how you XXXXXXXXXX XXX range for XXXXX's exposure
XXXXXX Tutor
XXXXX XXX XXXXXXXXXX XX XXXXX XXX XXXXXXXX XXXXXXXXX XXX the upper end and XXX lower XXX
Expert Tutor
XXX XXXXXXXX XXXXXXXXX XXX X.02, so XX,XXX,XXX XXXXXXX CAD would XX $180,XXX XXX XXXXXXX XX $120,XXX
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The XXXXX is the XXXXXXXXXX XXXXXXX XXXXX, therefore, = $60,XXX XXX
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The XXXXXXXX using XXXXXXXX XXXXX XXXXX XX less risk as XXX firm XX XXXXXXXXX JPY
XXXXXX Tutor
This means XXXXXXXX rate fluctuations XXXXXXX CAD XXX JPY XXX't affect the XXXXXX XX JPY borrowed
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Can XXXX do XXXXXXX XXXXXXX when the XXXXXXXX XXXX is good (XXXXXXXX XXXXXXXX XXXXXXXX)
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XXXX XXXXXX XXXX XX rates XXXXXXX changing between XXXXXXXXXXX payments.
Expert XXXXX
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