The company has contracted to purchase 100 million yen worth of equipment from a Japanese manufacturer over the course of a year, with progress payments made quarterly. To minimize costs from currency fluctuations, the company is considering using various derivative products like forwards to hedge currency risk. Forward contracts would allow the company to lock in exchange rates for future payments and reduce volatility from the yen strengthening against the dollar over the year.

1. OTC FX Products
 Financial Derivative Products provide a company the
ability to reduce volatility in their business.
 They come in many “shapes and sizes.”
 The Finance Team must fully understand their risks
and benefits!

2. Foreign Exchange Case Study
Utilizing a Mix of Derivative Products
 Company has contracted to purchase equipment from a
Japanese manufacturer
 Total price is 100MM Yen and it will take 1 year to complete
and deliver
 Progress payments to be made quarterly
 Company wants to minimize cost

3. 3
USD Cost of 100MM Yen at Various Levels

4. 4
Hedge Program for 100MM Yen Equipment Purchase
SPOT
15%
114.00
USD COST
131,580
YEN
15,000,000

5. Foreign Exchange Case Study
Utilizing a Mix of Derivative Products
 Company has contracted to purchase equipment from a
Japanese manufacturer
 Total price is 100MM Yen and it will take 1 year to complete
and deliver
 Progress payments to be made quarterly
 Company wants to minimize cost

6. 6
Hedge Program for 100MM Yen Equipment Purchase
SPOT
3M
Forward
15% 25%
114.00 FWD:
113.50
USD COST
131,580
USD COST
220,264
YEN
15,000,000
YEN
25,000,000

7. Long FX Forwards / NDFs
Key Characteristics
 Zero Upfront Cost
 For Rising Market
Expectations
If the Market
Is above the Forward Price, the customer buys 100% of the notional
of the hedge at the Forward Price.
is below the Forward Price, the customer buys 100% of the notional
of the hedge at the Forward Price.
Start Date Time
Forward Price
1 2
1
2
Conservative Aggressive
Spot Price
7
*The information and data provided is not tradable and is for indication-only purposes.

8. How do we calculate a Forward Price
114,000,000 Yen / 1,010,000 USD = 112.87
Therefore the 1Y Forward USDJPY price is 112.87
1y Yen rate 0.00 %
Spot USDJPY = 114.00
1y US Rates = 1.00 % 1y JPY Rates = 0.00%
1y USD rate 1.00%
114,000,0000 Yen
1,000,000 USD (x 114.00)
spot rate
114,000,000 Yen
1,010,000 USD
*The information and data provided is not tradable and is for indication-only purposes. 8