Fuji Inc, a Japanese importing firm anticipates the receipt of a payment of $8\mathrm{.}93$ million in $6$

months. Fuji$$s management team is worried about the course of the $/$ exchange rate over

the next $6$ months and decides to hedge. The current spot and forward rates are S$0=135/$

and Ft$=6$ months $=131/.$ The $-$interest rate is $0\mathrm{.}56\%$ and the $-$interest rate is $0\mathrm{.}48\%.$

a$)$ Compute the $$ cash flow to Fuji Inc. if it hedges its position using the

forward market.

b$)$ Compute the $$ cash flow to Fuji Inc. if it hedges its position using the

money market.

c$)$ Which of the two above hedges is best for Fuji Inc.?

Alternatively, Fuji Inc. is contemplating the use of an options hedge. Sanwa bank is offering

to Fuji Inc. the following options:

i$)$ Call option on $8\mathrm{.}93$ million at K$=135/,$ with a $3\mathrm{.}3\%$ premium $($price as a percent of

current spot rate$).$

ii$)$ Put option on $8\mathrm{.}93$ million at K$=135/,$ with a $2\mathrm{.}75\%$ premium $($price as a percent

of current spot rate$).$

d$)$ Which one is the right option to choose? What is the cost of the option hedge?

e$)$ Compute the break$-$even rate between the options hedge and the better one of

the forward and money market hedges. Explain whether or not the breakeven rate can help Fuji$$s management decide on which hedge to use.