Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 680 million yen payable in one year. The current spot rate is 133/$ and the one-year forward rate is 119/$. The annual interest rate is 5 percent in Japan and 8 percent in the United States. PCC can also buy a one-year call option on yen at the strike price of $.0072 per yen for a premium of .014 cents per yen.

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.