Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current spot rate is 125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.0140 cents per yen. Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. Required: a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. 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. c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge?

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current spot rate is 125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.0140 cents per yen. Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. Required: a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. 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. c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: An investor has $10m to invest and has the following options: 1) depositing it in a US bank account…

A: Exchange rate: It is the value of a currency that is exchanged with another currency.

Q: 4. Mitsubishi Heavy Industry (MHI) in New Jersey sold a ship to Princess Cruise Company (PCC) in…

A: A money market hedge involves using financial instruments in the money market to offset the risk of…

Q: Assume the annual interest rate on a British pound denominated asset maturing in 30 days is 7.5…

A: If Mtoto Company invests $18,000,000 in the dollar-denominated asset, it will earn an annual…

Q: Space-X Corporation, located in the United States, has an accounts payable obligation of $750…

A: Introduction The hedge ratio contrasts the cost of an investment that is hedged with the overall…

Q: Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 720 million yen…

A: A company has the option to use forward contracts to hedge its currency exposure or the money…

Q: Citigroup recently purchased $10,4 million worth of euro-denominated one-year CDs that pay 10…

A: Foreign exchange refers to the change of one currency into another currency on the basis of demand…

Q: Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000…

A: Money market hedge is a non derivative hedging teaquniqe where a domestic merchant locks his…

Q: a. Compute the future dollar costs of meeting this obligation using the money market and forward…

A: A company has the option to use forward contracts to hedge its currency exposure or the money…

Q: Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000…

A: Here, Amount Receivable in 1 year is 250,000 euros Spot Exchange Rate today is $1.20 per euro One…

Q: The Cambodian interest rate is 6% and the Vietnam interest rate is 7%. The spot exchange rate of one…

A: Covered interest rate arbitrage is the strategy where investors hedge their exchange rate risk by…

Q: You plan to what Geneva, Switzerland in three months to attend t international business conference…

A: Premium = Option Premium Rate * Contract SizePremium = $0.775 / SF * 50,000 SFPremium = $38,750

Q: XYZ company, based in the US, plans to finance in Japanese yen. The interest rate it will be 9%. It…

A: Nominal interest rate in Japanese yen = 9% = 0.09Appreciation of the yen against the USD = 4% = 0.04

Q: Morton Company obtains a one-year loan of 3,000,000 Japanese yen at an interest rate of 7%. At the…

A: The effective financing rate of borrowing in foreign currency is determined using the interest rate…

Q: Required: a. Calculate your expected dollar cost of buying SF9,000 if you choose to hedge by a call…

A: Forward contracts, futures contracts, and hedging are all concepts related to financial risk…

Q: An Indian exporter has entered into a sale transaction of pulses for $20,000 for which the payment…

A: calculation in words:Without Hedging:If the exporter does not hedge, the profit or loss would depend…

Q: If Boeing decides to use a money market hedge, what is the USD amount it would receive in 1 year…

A: A money market hedge is a financial strategy used by businesses and investors to protect themselves…

Q: The spot exchange rate for the Thai bhat is 33.14 bhat to the dollar. The Hotel Grand Chancellor…

A: The spot exchange rate seems to be the current market price for exchanging one currency for others…

Q: None

A: Certainly! Let's break down each part of the explanation in more detail:**a. Compute the future…

Q: You have $10,000 to invest for 90 days. Current spot rate: $1.32/₤. The 90-day forward rate is…

A: No arbitrage forward rate is that rate which is lie and agree with interest rate prevailing in the…

Q: XYZ Corporation, located in the United States, has an accounts payable obligation of ¥658 million…

A: As per the given information: Accounts payable obligation - ¥658 millionCurrent spot rate USDJPY -…

Q: ABC Corporation agreed that it will buy 1,000 USD at an exchange rate of P52 one month from now. The…

A: Transaction amount = $ 1000 Agreed exchange rate = P 52 Actual exchange rate = P 54

Q: Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen…

A: Hedging - Hedging can also be used to protect a corporation's balance sheet when it has invested in…

Q: nsurance company, IHI, is part of a swap agreement with investment bank Lachlin Bank on a notional…

A: In case of interest rate swap, one party pays fixed rate to the counter party and receives the…

Q: Carry Trade, Inc., borrows yen when the yen is trading at ¥120/US$. If the nominal annual interest…

Q: An American firm has just sold merchandise to a British customer for £100,000, with payment in…

A: Merchandise value = 100,000Strike price = 1.6660Premium cost =$0.01Spot exchange rate = $1.7100

Q: 2. Caterpillar (CAT), a US multinational, wants to borrow 150 million Canadian dollars at a fixed…

A: a) In order to design a swap that will net a bank, acting as an intermediary, 40 basis points per…

Q: On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to…

A: a. Record journal entries for forward contract hedge:

Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 520 million yen payable in one year. The current
spot rate is ¥125 per dollar and the one-year forward rate is ¥111 per dollar. The annual interest rate is 6 percent in Japan and 9
percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of
0.0140 cents per yen.
Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in
whole dollars not in millions.
Required:
a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges.
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.
c. At what future spot rate do you think PCC may be indifferent between the option and forward hedge?
> Answer is complete but not entirely correct.
Complete this question by entering your answers in the tabs below.
Required A Required B
Compute the future dollar costs of meeting this obligation using the money market and forward hedges.
$
$
Money Market
Forward Hedge
Required C
35,657,143 x
4,684,685✔
< Required A
Required B >

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: international finance

Step 2: solution

Step 3: solution b)

Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 15 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Use the following information for the next 8 questions. UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%.2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro.3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate. 4 If UCD decides to use options contracts to hedge its receivables, UCD shall
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. What is the future dollar proceeds of this sale using the money market hedge? Question 1 options: $1,180,000. $1,102,800. $1,150,000. $1,118,056. $1,200,000. $1,182,857.
Assume that Stevens Point Co. has net payables of 200,000 Singapore dollars in 90 days. The spot rate of the S$ is US$0.71/1S$, and the Singapore periodic interest rate is 1.5% over 90 days (annual rate is 6% per year, so periodic rate is 1.5% per 90 days). Assume US periodic interest rates of 1% over 90 days or (annual rate is 4%, so periodic rate is 1% per 90 days). If the U.S. firm could implement a money market hedge, what is the cost of the payables in US dollars in 90 days using a money market hedge? Assume borrowing and lending rates are the same for simplicity. Be precise.
Manshukh
Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 106,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchased a two-month call option on 106,000 pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The option has a strike price of $1.35 per pound and costs $1,060. The spot rate for pounds is $1.35 on June 20 and $1.40 on September 20. What amount will Torres Corporation report as an option expense in net income for the quarter ended September 30? Multiple Choice $530. $5,300. $2,300. $1,060.
ABC is asked to quote a price in Jamaican dollars for computer sales to a Jamaican company. The computers will be paid for in four equal, quarterly installments, beginning 90 days from now. ABC requires a minimum price of $2.5 million to accept this contract. Suppose the spot and forward rates for the J$ are as follows: Spot 90-Day 180-Day 270-Day 360-Day $0.0307 $0.0302 $0.0298 $0.0293 $0.0287 What is the minimum J$ price that ABC should quote for this order? a. J$ 87,108,014 b. J$ 82,781,457 c. J$ 84,745,763 d. J$ 81,433,225
Y2
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
Star Alien (US company) sold equipment to Heavy Metal Industry (Italian company) for 1-million-euro receivable in one year. The current spot rate is $1.15/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5 percent in Italy and 8 percent in the United States. Star Alien can also purchase a one-year put option on the euro at the strike price of $1.18 per euro for a premium of 9 cents per Euro. Assuming that the forward exchange rate is the best predictor of the future spot rate, what is the expected future dollar revenue when the option hedge is used? $1,200,000. $1,150,000. $1,297,200. $1,180,000. $1,180,000. $1,082,800. $1,102,800.
Sysco corporation has purchased currency call options to hedge a 4,320,000 Swedish krona payable. The premium is $0.015 (per unit of Swedish krona) and the exercise price of the option is $0.097 per Swedish krona. If the spot rate at the time of maturity is S0.105 per Swedish krona, what is the total amount paid by the corporation if it acts rationally (after accounting for the premium paid)? Question 27 options: S 419,040. $354,240. $518,400. S453,600. $483,840.
You have just purchased a six-month, $550,000 negotiable CD, which will pay a 8.5 percent annual interest rate. a. If the market rate on the CD rises to 9 percent, what is its current market value?b. If the market rate on the CD falls to 8.25 percent, what is its current market value?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS