P&G India. Procter and Gambles affiliate in India, P&G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge an 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for com- panies like P&G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the follow- ing exchange rate and interest rate data, recommend a hedging strategy. Spot rate: 120.60/$ 180-day forward rate 2.400/Rps Expected spot, 180 days 2.6000 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agents exchange rate 4.850% P&G Indias cost of capital 12.000%

(Please give step-by-step instructions and show what formula can be used to calculate it)