Princess Cruise Company(PCC)in New Jersey bought a ship fromMitsubishi Heavy Industry (MHI)in Bremen. PCC must pay MHI
Question:
Princess Cruise Company(PCC)in New Jersey bought a ship fromMitsubishi Heavy Industry (MHI)in Bremen. PCC must pay MHI 500 million euros in one year. The current spot rate is 1.12 $/ and the one-year forward rate is 1.17 $/. The annual interest rate is 1 % in Europe and 3 % in the U.S. PCC can also buy a one-year call option on euros at the strike price (E) of 1.17 $/ for a price of 0.012 $ per euro. PCC can also buy a put option on euros at same strike price (E) of 1.17 $/ for a price of 0.035 $ per euro.
a. Compute the future dollar cost of this obligation using the money market hedge answer- 571.09
b. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of this obligation when the option hedge is used. answer- 591
I have the answers (Shown next to the questions) but could you show the explanation to achieve these answers?