Procter and Gamble's affiliate in India, P&G India, procures much of its toiletries product line...
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Procter and Gamble's affiliate in India, P&G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge an 8.2 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Using the exchange rate and interest rate data below, compare alternate ways that P&G India might deal with its foreign exchange exposure. Assume a 360-day financial year.
Spot rate
2.51648/Rs
180-day forward rate
2.4312/Rs
Expected spot, 180 days
2.6191/Rs
180-day Indian rupee investing rate
8.19%
180-day Japanese yen investing rate
1.95%
P&G Indias cost of capital
11.12%
a. How much in Indian rupees will P&G India pay in 180 days without a hedge if the expected spot rate in 180 days is assumed to be 2.51648/Rs?
b. How much in Indian rupees will P&G India pay in 180 days with a forward market hedge?
c. How much in Indian rupees will P&G India pay in 180 days with a money market hedge?
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