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Projecta Inc. is a Japanese manufacturer of projectors and audio equipment for cinemas and music...

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Accounting

Projecta Inc. is a Japanese manufacturer of projectors and audio equipment for cinemas and music theatres across Asia. Projecta Inc. has recently begun implementing its expansion strategy into Europe. To fund working capital for this expansion, Projecta Inc. needs 8,000,000 Euro (EUR) for nine months. The company can either borrow the 8.0m Euro in Paris at 3.5% p.a., or borrow the equivalent of 8.0m Japanese Yen (JPY) in Tokyo at an interest rate of 1.5% p.a. The current spot exchange rate is 120.85JPY /EUR. The expected spot exchange rate in nine months is forecast to be 119.75JPY /EUR. Assume all interest and principal repayments are made at the end of the nine months at the expected exchange rate.

Required:

  1. In which currency should Projecta Inc. borrow the money from to realise the lowest borrowing cost? (5 marks)
  2. In nine months when the loan is settled, what would the JPY /1EUR spot exchange rate have to be where Projecta Inc. is indifferent between borrowing Japanese Yen and borrowing Euros? (3 marks)
  3. Name and describe one instrument that Projecta Inc. could use as a hedge to reduce foreign exchange rate risk in nine months when they repay their loan?

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