Problem 7

Intro

Perfect Purchase is a U.S. electronics retailer importing consumer electronics from Japan. The company will need 13 million yen () in one year to pay its suppliers.

The firm expects the following exchange rate scenarios and probabilities:

Scenario	Spot rate in one year	Probability
A	$0.0094	0.2
B	$0.0099	0.5
C	$0.0104	0.3

A call option on yen expiring in one year costs $0.00037 per yen and has an exercise price of $0.0099 per yen.

Attempt 1/6 for 10 pts.

Part 1

What is the total cost of hedging your payables with a call option (in $)?