IBM sold computers to Hitachi, a Japanese company, and invoiced 250 million payable in three months. Currently, the spot exchange rate is $0.015/ and the three-month forward rate is $0.01/. You can buy the three-month put option on Yen with the exercise rate of $0.012/ for the premium of $0.00008 per . Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Japan.

(a) Calculate your expected dollar proceeds of selling 250 million if you choose to hedge via put option on Yen.

(b) Calculate the future dollar proceeds of selling 250 million if you decide to hedge using a forward contract.

(c) If you were the financial manager of IBM, would you recommend hedging forward or option? Why?

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