Currency Futures [25 Points] A portfolio manager owns a Japanese bond worth ¥ 10,000,000 that will mature in one year. The Japanese yen is currently worth $ 0.0088, and the one- year future price is $ 0.0089. If the value of the Japanese yen were to fall, the portfolio manager would sustain a loss. If the value of the Japanese yen were to rise, the portfolio manager would experience a profit.
(a) What is the expected payment of the Japanese bond in U.S. dollars based on the current exchange rate?
(b) What is the expected payment based on the futures exchange rate?
(c) If, after a year, the Japanese yen is worth $0.0083., what is the loss from the decline in the value of the yen?
(d) To avoid the potential loss in Part (c) the portfolio manager hedges by selling futures contracts for the delivery of yen at $ 0.0089. If, after hedging, the price of the yen falls to $ 0.0083, what is the profit (or loss) for the portfolio manager.