Imagine you are the treasurer of a Japanese company exportingelectronic equipment to the United States. All revenues arereceived in USD and all other expenses (e.g., R&D costs, costsof employees etc) are incurred in Japanese Yen.
Required:
(i) Discuss whether you need to hedge the foreign exchange riskand factors you need to consider when designing contracts to hedgethe risks.
(ii) If the company is able to raise the price of its product inUSD if Yen appreciates without affecting the sales volume, howwould you adjust your recommendation in part (i) and sell yourstrategy to other executives?
Hint: If the company is able to raise the price of itsproduct in USD if Yen appreciates, what does it tell you about thecompany’s foreign exchange exposure? Which derivative security(securities) could be used to hedge this risk? There is no modelanswer to this question, you just have to provide reasonedexplanations.
