Unilevers affiliate in Mumbai, Unilever India, procures much of its toiletries product line from a...
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Unilevers affiliate in Mumbai, Unilever India, procures much of its toiletries product line from a Tokyo-based company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. Unilever India wishes to hedge an 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like Unilever India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy.
180-day account payable, Japanese yen ()
8,500,000
Spot rate (/$)
120.60
Spot rate, rupees/dollar (Rs/$)
47.75
180-day forward rate (/Rs)
2.4000
Expected spot rate in 180 days (/Rs)
2.6000
180-day Indian rupee investing rate
8.000%
180-day Japanese yen investing rate
1.500%
Currency agent's exchange rate fee
4.850%
Unilever India's cost of capital
12.00%
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