Please answer Problem 6 from International Financial Management (8th Edition)

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#6

Princess Cruise Company (PCC) Purchased a Ship for 500 Million Yen Payable in 1 Year. The Current Spot Rate is 124 Yen/$ and the 1 Year Forward Rate 110 Yen/$. The annual interest rate is 5% in Japan and 8% in the United States. Princess Cruise Company can also buy a 1 Year Call Option on Yen at the strike price of $.0081/Yen for a Premium Premium is .014 Cents Per Yen.

A. Compute the future dollar costs of meeting this obligation using the money market and forward hedges.

B. Assuming the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used.

C. At what Future spot Rate do you thing the PCC may be indifferent between the option and forward hedge?