Princess Cruise Company $($PCC$)$ purchased a ship from Mitsubishi Heavy Industry for $580$ million yen payable in one year. The current

spot rate is $128$ per dollar and the one$-$year forward rate is $114$ per dollar. The annual interest rate is $6$ percent in Japan and $9$

percent in the United States. PCC can also buy a one$-$year call option on yen at the strike price of $$0\mathrm{.}0077$ per yen for a premium of

$0\mathrm{.}0140$ cents per yen.

Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in

whole dollars not in millions.

Required:

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

b$.$ Assuming that 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 think PCC may be indifferent between the option and forward hedge?

Complete this question by entering your answers in the tabs below.

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

Money Market

Forward Hedge

Princess Cruise Company $($PCC$)$ purchased a ship from Mitsubishi Heavy Industry for $580$ million yen payable in one year. The current

spot rate is $128$ per dollar and the one$-$year forward rate is $114$ per dollar. The annual interest rate is $6$ percent in Japan and $9$

percent in the United States. PCC can also buy a one$-$year call option on yen at the strike price of $$0\mathrm{.}0077$ per yen for a premium of

$0\mathrm{.}0140$ cents per yen.

Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in

whole dollars not in millions.

Required:

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

b$.$ Assuming that 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 think PCC may be indifferent between the option and forward hedge?

Complete this question by entering your answers in the tabs below.

Assuming that 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.

Expected future dollar cost

Princess Cruise Company $($PCC$)$ purchased a ship from Mitsubishi Heavy Industry for $580$ million yen payable in one year. The current

spot rate is $128$ per dollar and the one$-$year forward rate is $114$ per dollar. The annual interest rate is $6$ percent in Japan and $9$

percent in the United States. PCC can also buy a one$-$year call option on yen at the strike price of $$0\mathrm{.}0077$ per yen for a premium of

$0\mathrm{.}0140$ cents per yen.

Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in

whole dollars not in millions.

Required:

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

b$.$ Assuming that 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 think PCC may be indifferent between the option and forward hedge?

Complete this question by entering your answers in the tabs below.

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