6. Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 550,000,000 yen in one year. The current spot rate is 125 yen per dollar and the one-year forward rate is 112 yen per dollar. The annual interest rate is 5% in Japan and 8% in the U.S. PCC can also buy a one-year OTC call option on 550,000,000 yen at the strike price of $.0080 per yen for a premium of $.00013 per yen.

(a) Compute the future US dollar costs of obtaining the 550,000,000 yen using the money market hedge and the 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?