Use the information below to answer the questions that follows:

Tektronix needs to hedge a sale of their components for 80,000,000 to a Japanese firm, with payment received 6 months from now. They have obtained the following quotes from an investment bank:

Spot rate (U.S. $/): .0088

Six-month forward rate (U.S. $/): .0092

Japanese borrowing rate: 8% per year

Japanese investment rate: 6% per year

US borrowing rate: 10% per year

US investment rate: 8% per year

Textronixs annual WACC 9% per year

Textronix also receives another quote (from internal analysts) about the 6-month spot rate = 0.0093 $/Yen

To construct a money market hedge for this transaction, they would undertake the following steps.

a. Borrow 76,923,077 in Japan; convert to $ using Spot rate (U.S. $/) = .0088 to get $676,923.1; in 6 months repay loan of 80,000,000. To compare with the forward and unhedged positions, invest this amount for 6 months by either investing in the U.S. capital market to get about $704,000 or invest in the company to get about $707,384; or repay an existing loan to get about $710,769. Since these amounts are less than the forward hedge, you would not undertake a money market hedge.

b. Convert $704,000 using Spot rate (U.S. $/) = .0088 to invest 80,000,000 in Japan; in 6 months, use principal and interest to pay 80,000,000 to supplier. To compare with the forward and unhedged positions, calculate the opportunity cost of doing the money market hedge when the funds could have been invested in the U.S. capital market with a value of about $732,160; or invested in the company with a value of about $735,680; or repaid an existing loan with a value of about $739,200. Since two of these amounts are more than the forward hedge, you may undertake a money market hedge.

c. Borrow 80,000,000 in Japan; convert to $ using Spot rate (U.S. $/) = .0088 to get $704,000; in 6 months, repay loan of 80,000,000. To compare with the forward and unhedged positions, compare the alternative uses for this amount for 6 months by investing in the U.S. capital market to get about $732,160; or invest in the company to get about $735,680; or repay an existing loan to get about $739,200. Since two of these amounts are more than the forward hedge, you may undertake a money market hedge.

d. Convert $676,923.1 using Spot rate (U.S. $/) = .0088 to invest 76,923,077 in Japan; in 6 months, use principal and interest to pay 80,000,000 to supplier. To compare with the forward and unhedged positions, calculate the opportunity cost of doing the money market hedge when the funds could have been invested in the U.S. capital market with a value of about $704,000; or been invested in the company with a value of about $707,384; or repaid an existing loan with a value of about $710,769. Since these amounts are less than the forward hedge, you would not undertake a money market hedge.