6. Hedging with forwards, options and money market. Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable in one year. The current spot rate is 124/$ and the one year forward rate is 110/$. The annual interest rate is 5 percent in Japan and 8 percent in the U.S. PCC can also buy a oneyear call option on yen at the strike price of $0.0081 per yen for a premium of 0.014 cents per yen.

a) Compute the US dollar cash flows associated with 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 US dollar cash flows associated with meeting this obligation when the option hedge is used.

c) At what future spot rate, do you think PCC may be indifferent between the forward and the option hedge?