Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 720 million yen payable in one year. The current spot rate is ¥135/$ and the one-year forward rate is ¥121/$. The annual interest rate is 7 percent in Japan and 10 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $.0070 per yen for a premium of .014 cents per yen. a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. Money Market Forward Hedge b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used. Expected future dollar cost

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 720 million yen payable in one year. The current spot rate is ¥135/$ and the one-year forward rate is ¥121/$. The annual interest rate is 7 percent in Japan and 10 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $.0070 per yen for a premium of .014 cents per yen. a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. Money Market Forward Hedge b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used. Expected future dollar cost

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 55QA

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