Question
A U.S. firm has a debt obligation of 194 million payable in one year. The current spot rate is 116 per U.S. dollar and the
A U.S. firm has a debt obligation of 194 million payable in one year. The current spot rate is 116 per U.S. dollar and the one-year forward rate is 110 per U.S. dollar. Additionally, a one-year Call option on the Yen with a strike price of $0.0085 per yen can be purchased for a premium of 0.011 cent per yen. The risk-free money-market rate in Japan is 1.6% and the risk-free money-market rate in the U.S. is 3.9%. Calculate the future U.S. dollar cost of meeting this obligation using a call option hedge. Assume that at expiration, the spot rate will be above the option strike price such that the option contract will be exercised. Don't forget to adjust the Call premium payment made at the beginning of the year by the time value of money since you are calculating the future dollar cost, that is, at the end of the year.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started