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/$ and the one-year forward rate is ¥112/$. 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 $.0079 per yen for a premium of .014 cents per yen. a. Compute the future dollar costs of meeting this obligation using the money market and forward hedges. b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 540 million yen payable in one year. The current spot rate is ¥126/$ and the one-year forward rate is ¥112/$. 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 $.0079 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.
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
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