A U.S. firm has a debt obligation of Yen 475 million payable in one year. The current spot rate is Yen 116 per US dollar and the one-year forward rate is Yen 108 per US dollar. Additionally, a one-year Call option on the Yen with a strike price of $0.0082 per yen can be purchased for a premium of 0.01 cent per yen. The risk-free money-market rate in Japan is 1.7% and the risk-free money rate in the US is 3.5%. Calculate the future US dollar cost of meeting this obligation using a forward contract hedge.

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Which of the following would NOT constitute a valid argument in favor of firms hedging FX exposure?

a. Firms are able to hedge foreign exchange rate exposure at lower costs than most of their sharesholders.

b. Firm managers are the ones with the most knowledge about the incoming and outgoing cash flows of the firm denominated in a foreign currency.

c. Firm managers are better equipped than shareholders to take advantage of the frequent arbitrage opportunities in currency markets.

d. Large swings in foreign exchange rates could trigger debt covenants that could cost the firm significant amounts of money and/or restrict some of its activities.