Q:

Hedging against exchange risk

How does one hedge against any exchange risk?

A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using a money market hdege that will eliminate any exchange rate risk.
1-year rates of interest:
$$
\begin{array}{r|c|c}
\text{Currency} & \text{Borrowing} & \text{Lending}\\
\hline
Dollar\ (\$) & 4.50\ \% & 4.00\ \%  \\
Euro\ (€) & 6.00\ \% & 5.35\ \%  \\
Yen\ (¥) & 1.00\ \% & 0.75\ \%
\end{array}
$$
The spot rates are as follows:
$$
\begin{array}{cc}
\ Current\ Spot\ Exchange\ Rates & \ & \ One\ Year\ Forward\ Rates\\
\
\$ 1.25 = €1.00 & \ & \$ 1.2262 = €1.00  \\
\$ 1.00 = ¥1.00 & \ & \$ 1.03 = ¥100  \\\end{array}
$$

A:

So after much calculations, this is the approach:
In 1 year you need €1,000,000, how much do you need currently ($x$)?
If the euro interest rate is at 6%, 
$$ x\ \times\ (1+6\%) = x(1.06) = €\ 1,000,000$$
$$ \begin{align}x\ = \frac{€\ 1,000,000}{1.06} 
\newline \therefore\ x\ = €\ 943,396.22\end{align}$$
With the current spot rate, we can convert € 943,396.22 into dollars by:
$$€\ 943,396.22 \times  \frac{$1.25}{€} = $\ 1,179,245.28$$
You would convert these dollars to yen:
$$\$\ 1,179,245.28 \times \frac{¥\ 100}{$} = ¥\ 117,924,528.30$$

The answer is:
You would borrow € 943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate, and receive ¥117,924,528.30

