10.7 Singflux. Singflux is a Singapore-based company that manufactures, sells, and installs water-treatment plants. On June 1, the company sold a water-treat- ment 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$, a 7.27% per annum premium Money Rates One month Three months Twelve months Singapore 5.9850% 6.1895% 7.9515% Japan 0.0695% 0.0695% 0.1505% Differential 5.9155% 6.1200% 7.8010% Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot 80.31/S$, for example, is a mid-point range. On June 1, the spot yen traded in London from 80.36/S$ to 79.86/S$. Singflux's Japanese com- petitors are currently borrowing from Japanese banks at a spread of one percentage point above the Japanese money rate. Singflux's weighted average cost of capital is 10%, and the company wishes to protect the Singapore dollar value of this receivable. These 3-month options are available from Kokoda Bank: a call option on 100,000,000 at exercise price of 80.00/5$: a 1% premium; or a put option on 100,000,000, at exercise price of 80.00/5$: 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