Princess Crulse Company $($PCC$)$ purchased a ship from Mitsubishl Heavy Industry for $860$ million yen payable in one year. The current

spot rate is $\frac{142}{\text{\$}}$ and the one$-$year forward rate is $\frac{128}{\text{\$}}.$ 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 $$\mathrm{.}0063$ 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.

Expected future dollar costPrincess Cruise Company $($PCC$)$ purchased a ship from Mitsubishi Heavy Industry for $860$ million yen payable in one year. The current spot rate is $142/$$ and the one$-$year forward rate is $128/$$$.$ 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 $$\mathrm{.}0063$ per yen for a premium of $\mathrm{.}014$ 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.