Singflux. Singflux is a Singapore-based company that manufactures, sells, and installs water-treatment plants. On June 1, the company sold a water-treatment plant to the City of Hiroshima, Japan, for installation in Hiroshima’s famous cherry blossom gardens. The sale was priced in yen at ¥100,000,000, with payment due in three months.

Spot exchange rate: ¥80.31/S$ (closing mid-rates)

1-month forward rate: ¥79.96/S$, a 5.25%

per annum premium 3-month forward: ¥79.14/S$, a 5.91%

per annum premium 1-year forward: ¥74.87/S$, a 7.27% per annum premium Money Rates Singapore Japan Differential One month 5.9850% 0.0695% 5.9155%
Three months 6.1895% 0.0695% 6.1200%
Twelve months 7.9515% 0.1505% 7.8010%
Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot ¥80.31/S$, for example, is a mid-point range. On June 1, the spot yen traded in London from ¥80.36/
S$ to ¥79.86/S$. Singflux’s Japanese competitors are currently borrowing from Japanese banks at a spread of one percentage point above the Japanese money rate. Singflux’s weighted average cost of capital is 10%, and the company wishes to protect the Singapore dollar value of this receivable.
These 3-month options are available from Kokoda Bank: a call option on ¥100,000,000 at exercise price of ¥80.00/S$: a 1% premium; or a put option on ¥100,000,000, at exercise price of ¥80.00/
S$: a 3% premium.

a. What are the costs and benefits of alternative hedges? Which would you recommend and why?

b. What is the break-even reinvestment rate when comparing forward and money market alternatives?