Proctor and Gambles affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge a 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like P & G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Suppose the following is true:

1. spot rate between /$: 120.60/$

2. spot rate between (Rs/$): Rs47.75/$

3. 180-day forward rate (/Rs): 2.4/Rs

4. 180-day expected spot rate(/Rs): 2.6/Rs

5. 180-day Indian rupee investing rate: 8% per annum

6. 180-day Japanese yen investing rate: 1.5% per annum

7. Currency agent's exchange rate fee: 4.85%

8. P & G India's cost of capital:12% per annum If P & G India decides to hedge the payables in the money market what would they do?

1.Borrow in India at 8% per annum and invest in Japan at 1.5% per annum

2.Borrow in India at 12% per annum and invest in Japan at 1.5% per annum

3.Borrow in Japan at 1.5% per annum and invest in India at 8% per annum.