Question 4. (5+4 points): Apple purchased computer chips from NEC, a Japanese electronics concern, and was billed 900,000,000 payable in six months. Currently, the spot exchange rate is $.0094 per yen and the six-month forward rate is $.0098 per yen. The six-month money market interest rate is 12 percent per annum in the United States and 9 percent per annum in Japan.

Apple is considering two hedging alternatives: obtain a forward contract to deal with the yen payable or use money market hedge to take care of the yen payable. Which alternative would you recommend? Why?

How would Apple use currency option contracts to hedge this transaction? Explain (briefly) your answer.