Question 4 Unilever is a British-Dutch transnational consumer goods company, and it has a subsidiary in Indonesia, Unilever Indonesia (UI). UI procures much of its product line from a Japanese company. Because of the shortage of working capital in Indonesia, payment terms by Indonesian importers are typically 180 days or longer. UI wishes to hedge a 10 million Japanese yen (JPY) payable. Although options are not available on the Indonesian rupiah (IDR), forward rates are available against the yen. Additionally, a common practice in Indonesia is for companies like UI to work with local currency agents who will lock in the current spot exchange rate in exchange for a 2.5% upfront fee. Assume the following exchange rates and interest rates are available for UI: (a) (b) Exchange Rate Bid Ask Spot rate for JPY 131.30 IDR 131.80 IDR 180-day forward rate for JPY 132.80 IDR 133.20 IDR Interest Rate Bid Ask 180-day interest rate for IDR 3.50% 3.80% 180-day interest rate for JPY 1.70% 1.90% Suppose UI uses a forward market hedge. How much does it cost UI (correct to the nearest rupiah) to settle the JPY payable? (5 marks) Suppose UI uses a money market hedge and borrows any required funds. How much does it cost UI (correct to the nearest rupiah) to settle the JPY payable? (10 marks) (c) (d) Suppose UI uses a currency agent hedge and pays the agent's fee using cash. Note that the agent's upfront fee is based on the current spot exchange rate and there is an opportunity cost associated with the fee paid. How much does it cost UI (correct to the nearest rupiah) to settle the JPY payable. (5 marks) Given that UI makes a decision (i.c., forward market hedge, money market hedge, currency agent hedge) purely on a cost basis, what would be its optimal choice? (5 marks) (TOTAL: 25 marks)