To do business in India, with its underdeveloped capital markets, some

companies accept payment terms on payables as long as $180$ days on a regular basis. Assume

that your company wants to hedge an $8\mathrm{.}5$ million Japanese yen payable and convert it into

rupees $($Rs$).$ Because the currency is relatively small in world markets, you will have to

calculate your own cross rate. Also, foreign currency options are not available on the Indian

rupee. Instead, an Indian currency agent is available who will lock in the current spot

exchange rate for a $4\mathrm{.}85\%$ fee $($payable up front in rupees$).$ Given the following exchange

rate and interest rate data, compute four different available choices and recommend a

hedging strategy for the $8\mathrm{.}5$ million payable.

Spot rate, yen$/$dollar $120\mathrm{.}60/$$ $180-$day rupee investment rate $8\mathrm{.}00\%$

Spot rate, rupees$/$dollar Rs$47\mathrm{.}75/$$ $180-$day yen investment rate $1\mathrm{.}50\%$

$180-$day forward rate, yen$/$rupee $2\mathrm{.}4000/$Rs Cost of capital $($WACC$)12\mathrm{.}00\%$

Forecast spot rate in $180$ days $2\mathrm{.}6000/$Rs