XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank
in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of $0.012 per 100 yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is If firm is considering a forward hedge what should it do?
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