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Krystal is a U.S.-based company that manufactures, sells, and installs water purification equipment. On April 11, the company sold a system to the City of
Krystal is a U.S.-based company that manufactures, sells, and installs water purification equipment. On April 11, the company sold a system to the City of Nagasaki, Japan, for installation in Nagasaki's famous Glover Gardens. The sale was priced in yen at 25,000,000, with payment due in three months. The exchange rate and interest rate data are shown in the following tables: Krystal can be borrowing yen from Japanese banks at a spread of two percentage points above the Japanese money rate. Krystal's weighted average cost of capital is 15%, and the company wishes to protect the dollar value of this receivable. 3-month options are available from Kyushu Bank: A. a yen call option on 25,000,000 at exercise price of 117.000/S, with a 1.3% premium B. a yen put option on 25.000,000. at exercise price of 117.000/$, with a 3.7% premium. How much in U.S. dollars will Krystal receive in 3 months without a hedge if the expected spot rate in 3 months is assumed to be 117.974 How much in U.S. dollars will Krystal receive in 3 months with a forward market hedge? How much in U.S. dollars will Krystal receive in 3 months with a money market hedge? How much in U.S. dollars will Krystal receive in 3 months with an option hedge if the expected spot rate in 3 months is assumed to be above 117.000/$ (i.e., yen's value in 3 months is expected to be lower than 117.000/$)
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