Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 540 million yen payable in one year. The current spot rate is ¥126 per dollar and the one-year forward rate is ¥112 per dollar. 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 $0.0079 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 540 million yen payable in one year. The current spot rate is ¥126 per dollar and the one-year forward rate is ¥112 per dollar. 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 $0.0079 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 540 million yen payable in one year. The current
spot rate is ¥126 per dollar and the one-year forward rate is ¥112 per dollar. 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 $0.0079 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?
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