Skip to main content
No. of Recommendations: 2
Forward/Spot = (1+ Japan's interest rate)/(1+ US interest rate)

Ya, what he said!!!

Maybe they don't go back to yen right away -- maybe they reinvest in dollars

Yes, but as the forward rate goes out it takes this into account. At some time the money is repatriated to Yen and the exchange rate will eat the difference in interest rate returns.

So for three years
(1+ Japan's interest rate)^3/(1+ US interest rate)^3

2. They can hedge their risk at the start of the thing with a forward or futures contract.

And the hedge they would get into right now is for interest rates in Japan at 0% and interest in the US at 5% all calculated out.

The risk that is hedged in this case is say for Disney Tokyo. They have a cash inflow of yen and they want dollars, so they will purchase forwards to ensure that they get the set amount of dollars for yens and thus they hedge away the exchange rate risk. If the exchange rate goes the other way, well Disney loses some extra take but that is the nature of insurance.

Thanks Rivet.


Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.