Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 500 million payable in one year. The current spot rate is 124/$ and the one-year forward rate is 110/$. Interest rate is 5% per annum in Japan and 8% per annum in the U.S. The 1-year call option on at the strike price of $.0081/ currently sells for a premium of .014 cents per Yen.

(1) Construct forward hedge for PCC and calculate the future dollar cost of meeting its obligation using this hedge.

(2) Construct money market hedge (MMH) for PCC and calculate the future dollar cost of meeting its obligation using MMH.

(3) How to hedge PCCs foreign currency exposure in option market? Conduct cash flow analysis to examine the result of option hedge.

(4) At what future spot rate will PCC be indifferent between option hedge and forward hedge? Explain.