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What exchange risk did the Japanese investor face at the time of his purchase?

by | Nov 30, 2023 | questions

In 1990, a Japanese investor paid $100 million for an office building in downtown Los Angeles. At the time, the exchange rate was 짜145/$1. When the
investor went to sell the building five years later, in early 1995, the exchange rate was 짜85/$1 and the building’s value had collapsed to $50 million.

a. What exchange risk did the Japanese investor face at the time of his purchase?

b. How could the investor have hedged his risk?

c. Suppose the investor financed the building with a 10 percent down payment in yen and a 90 percent dollar loan accumulating interest at the rate of 8
percent per annum. Since this is a zero-coupon loan, the interest on it (along with the principal) is not due and payable until the building is sold. How
much has the investor lost in yen terms? In dollar terms?

d. Suppose the investor financed the building with a 10 percent down payment in yen and a 90 percent yen loan accumulating interest at the rate of 3
percent per annum. Since this is a zero-coupon loan, the interest on it (along with the principal) is not due and payable until the building is sold. How
much has the investor lost in yen terms? In dollar terms?

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