Question
GED corporation, located in the United States, has an account payable obligation of 800 million payable in one year to a bank in Tokyo. The
GED corporation, located in the United States, has an account payable obligation of 800 million payable in one year to a bank in Tokyo. The current spot rate is 115/$1.00 and the one-year forward rate is 110/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. GED can also buy a one-year call option on yen at the strike price of $0.0080 per yen for a premium of 0.010 cents per yen. At what one-year forward rate would GED be indifferent between money market hedging and forward market hedging?
a) 116/$1.00
b) 109/$1.00
c) 111.75/$1.00
d) 112.72/$1.00
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