Use the following information to answer the next two questions.
XYZ (American firm) has a plant in Japan. XYZ anticipates that they will need 25,000,0000 yen to meet next month's payroll. XYZ is considering entering into a forward contract to mitigate exchange rate risk. XYZ finds a bank that is willing to enter into a one month forward contract on 25 million yen at a forward rate of $.005/yen. Currently, the spot rate is $.004/yen. Assume that the spot rate is $.0045/yen when the forward contract expires.
What will XYZ do to mitigate its exchange rate risk?
Wait one month and buy 25 million yen to meet their payroll obligations
Wait one month and sell 25 million yen to meet their payroll obligations
Buy a forward contract on 25 million yen
Sell a forward contract on 25 million yen
Find XYZ's profit/loss (in USD) from their forward contract.
25000
-25000
12500
-12500