Forex Risk Management Strategies for Businesses

What are the options available to Apex Corporation to manage the risk of a rising yen against the payment due to its Japanese supplier?

1. Buy 20-yen call options at a strike price of $0.00800.

2. Buy 10 three-month yen futures contracts at a price of $0.007940 per yen.

Answer:

Apex Corporation is exploring financial instruments like options and futures contracts to hedge against the risk of fluctuating exchange rates with the Japanese yen.

Explanation:

The situation presented here revolves around the concept of financial risk management, particularly in dealing with forex risk using currency derivatives. In this case, Apex Corporation is facing a payment of ¥125 million to its Japanese supplier in three months. To mitigate the uncertainty of the future yen exchange rate, Apex Corporation can utilize different financial instruments such as options and futures contracts.

Options provide the holder with the right, but not the obligation, to buy or sell a currency at a predetermined rate (strike price) on or before a specific date. By purchasing 20-yen call options, the company can secure the maximum rate they would have to pay, effectively protecting against a rising yen. However, there is a cost involved in the form of a premium for the option.

On the other hand, futures contracts dictate the buying or selling of a specified amount of currency at a predetermined future date and price. Opting for 10 three-month yen futures contracts would require Apex Corporation to transact at the agreed-upon rate, regardless of the future spot rate. This ensures protection against fluctuating forex rates but also eliminates the possibility of benefiting from a potential yen depreciation.

In conclusion, deciding between options and futures contracts involves considering the balance between securing a favorable exchange rate and potential costs or missed opportunities due to fixed transactions.