Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 560 million yen payable in one year. The current spot rate is 127 per dollar and the one-year forward rate is 113 per dollar. 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 $0.0078 per yen for a premium of 0.0140 cents per yen. Required:

1. Assuming that the forward exchange rate is the best predictor of the future spot, compute the expected future dollar cost of meeting this obligation when the option hedge is used.
2. At what future spot rate do you think PCC may be indifferent between the option and forward hedge?