ABC has just signed a contract to purchase light rail cars from a manufacturer in Japan for yen 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, ABC is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

The spot exchange rate is $0.00833/yen

The six month forward rate is $0.00822/yen

ABC's cost of capital is 8%

The Japan zone 6-month borrowing rate is 9% (or 4.5% for 6 months)

The Japan zone 6-month lending rate is 7% (or 3.5% for 6 months)

The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)

The U.S. 6-month lending rate is 6% (or 3% for 6 months)

December call options for yen 750,000; strike price $0.00828, premium price is 1.1%

ABC's forecast for 6-month spot rates is $0.00827/yen

The budget rate, or the highest acceptable purchase price for this project, is

$24,900 or $0.00830/yen

1. Refer to Instruction A. If ABC locks in the forward hedge at $0.00822/yen, and the spot rate when the transaction was recorded on the books was $0.00833/yen, this will result in a "foreign exchange accounting transaction ( gain, loss ) of ( $330 , Yen330 ).

(Select each of the two.)

2. Refer to Instruction A. ABC would be ( better off , worse off ) by an amount equal to ( $150 , Yen150 ) with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct. (Select each of the two.)

3. Refer to Instruction A. What is the cost of a call option hedge for ABC's yen receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.)

A) $273.24

B) $281.43

C) $284.17

D) $285.54