Money, Banking, and International Financebecause Caterpillar deposits funds in a Korean bank. In theory, it could deposit these funds in a
U.S. bank to earn interest for six months, and then uses the other strategies.
ݏ݀݊ݑ݂ ݐ ݐ݅ݏ݁݀=
௨௧௨ ௩௨
ଵାయలబ
=
,ଷ ௪௦
ଵା.ଵభఴబయలబ
= 5 , 583. 3 ݈݈݊݅݅݉ ݏ݊ݓ (12)
ݐ݊ݑ݉ܽ($)= 5 , 583. 3 ݈݈݊݅݅݉ ݏ݊ݓ൭$1ൗ 1 , 200 ݏ݊ݓ൱=$4. 65 ݈݈݊݅݅݉ (13)
In another example, Seattle Scientific sold equipment for 12.5 million yen to a Japanese
firm. Accounts receivable is due in 30 days. An analyst at Seattle Scientific observes the four
strategies:
- Seattle Scientific uses today’s spot exchange rate, 111.40 yen per $1 today.
- Seattle Scientific buys a 30 - day forward with a fixed exchange rate of 111.00 yen per $1.
- Seattle Scientific uses a 90 - day forward rate with an exchange rate of 110.40 yen per $1.
- The Japanese firm pays cash today if Seattle Scientific would grant a 4.5% discount.
Strategy 1: Seattle Scientific does nothing and uses the spot exchange rate. Unfortunately,
this strategy entails an exchange rate risk. If the spot exchange rate does not change, then Seattle
Scientific receives $112,208.26, computed in Equation 14. If the yen depreciates relative to the
U.S. dollar, subsequently, Seattle Scientific would receive fewer U.S. dollars.
ݐ݊ݑ݉ܽ($)= 12. 5 ݈݈݊݅݅݉ ݊݁ݕ൭$1ൗ 111. 40 ݊݁ݕ൱=$112, 208. 26 (14)
Strategy 2: Seattle Scientific uses a 30 - day forward contract and locks in the future
exchange rate. This strategy carries no exchange rate risk and is better than Strategy 1. Thus,
Seattle Scientific receives $112,612.61, calculated in Equation 15.
ݐ݊ݑ݉ܽ($)= 12. 5 ݈݈݊݅݅݉ ݊݁ݕ൭$1ൗ 111. 00 ݊݁ݕ൱=$112, 612. 61 (15)
Strategy 3: Seattle Scientific uses a 90 - day forward contract. Again, this strategy has no
exchange rate risk. Hence, Seattle Scientific receives $113,224.64 in ninety days, computed in
Equation 16. Although this strategy seems odd, Seattle Scientific would deposit the money in a
Japanese bank for an extra 60 days, earning interest. Although Strategy 3 is better than the first
two strategies, the analyst should consider the time value of money, which was removed from