A company anticipates receiving 30,000 Japanese Yen in 6 months. How can the company use forward contracts to establish a perfect hedge if each forward contract is for 10,000 Japanese yen and expires in 6 months? The company should
[ Select ]
short
long
3 futures.

Question

A company anticipates receiving 30,000 Japanese Yen in 6 months. How can the company use forward contracts to establish a perfect hedge if each forward contract is for 10,000 Japanese yen and expires in 6 months? The company should 
[ Select ]
short
long
 3 futures.

BlackTom AI · Accepted Answer

Receiving 30,000 JPY in six months is equivalent to being long (exposed to gains or losses from) Japanese yen. To eliminate the exchange-rate risk, the firm should take the opposite position in the forward market: sell (short) yen forward.

Relevant concepts:
- A forward contract locks in an exchange rate for a future date, eliminating spot-rate uncertainty.
- To hedge a future receipt of foreign currency, you short (sell) forwards; to hedge a future payment in foreign currency, you long (buy) forwards.
- A perfect hedge requires matching maturity and notional amount.

Step-by-step reasoning and calculations:
1. Exposure: +30,000 JPY to be received in 6 months (long JPY exposure).
2. Forward contract size: 10,000 JPY per contract, maturity = 6 months (matches exposure horizon).
3. Number of contracts required = exposure / contract size = 30,000 JPY ÷ 10,000 JPY per contract = 3 contracts.
4. Direction: since the firm will receive JPY, it should sell (short) JPY forward to lock in the exchange rate and offset any depreciation of JPY. Thus, enter into 3 short forward contracts that expire in 6 months.

Why this is correct:
- Shorting 3 forwards offsets the long exposure exactly (3 × 10,000 JPY = 30,000 JPY), so any change in spot JPY in six months is offset by the forward position—this is a perfect hedge.
- Locking the forward rate removes FX uncertainty for the cash flow.

Why the other option is incorrect:
- Going long forwards would increase exposure to JPY: if JPY weakens you would lose on both the forward and the receipt, so it fails to hedge.
- Entering a different number of contracts would leave residual exposure (under- or over-hedged), so it would not be a perfect hedge.

Conclusion: The firm should short the forward contracts (specifically, short 3 six‑month forward contracts). This confirms the provided correct answer: "short."

A company anticipates receiving 30,000 Japanese Yen in 6 months. How can the company use forward contracts to establish a perfect hedge if each forward contract is for 10,000 Japanese yen and expires in 6 months? The company should [ Select ] short long 3 futures.多重下拉选择题

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