Krystal. 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 $($Click on the following icon in order to copy its contents into a spreadsheet.$)$

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Spot exchange rate: $,\frac{118\mathrm{.}247}{\text{\$}}($closing mid$-$rates$)$

$1-$month forward rate: $,\frac{117\mathrm{.}781}{\text{\$}},$ a $4\mathrm{.}75\%$ per annum premium

$3-$month forward: $,\frac{116\mathrm{.}912}{\text{\$}},$ a $4\mathrm{.}57\%$ per annum premium

$($Click on the following icon in order to copy its contents into a spreadsheet.$)$

of Namasaki Janan, for installation in Nagasaki's famous Glover Gardens $($where Puccini's Madame Butterfly waited for the return of Lt$.$ Pinkerton$).$ The sale was priced in

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Question Viewer $0,$ with payment due in three months. The exchange rate and interest rate data are shown in the popup window:

Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot $\frac{118\mathrm{.}247}{\text{\$}},$ for example, is

a mid$-$point range. On April $11,$ the spot yen traded in London from $\frac{118\mathrm{.}999}{\text{\$}}$ to $\frac{117\mathrm{.}494}{\text{\$}}.$ Krystal's Japanese competitors are currently 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 $16\mathrm{.}5\%,$ and the company wishes to protect the

dollar value of this receivable.

$3-$month options are available from Kyushu Bank: call option on $28,000,000$ at exercise price of $\frac{118\mathrm{.}000}{\text{\$}}$ : a $2\%$ premium; or a put option on $28,000,000,$ at exercise

price of $\frac{118\mathrm{.}000}{\text{\$}}$: a $4\%$ premium.

a$.$ What are the costs and benefits of alternative hedges? Which would you recommend, and why?

b$.$ What is the break$-$even reinvestment rate when comparing forward and money market alternatives?