Question

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 cent per yen. The future dollar cost of meeting this obligation using the money market hedge is

Answer 1

Answer:

forwards:    U$D 6,880,733.95 dollars

call option: U$D 6,540,000.00 dollars

Explanation:

obligation within a year: ¥750,000,000

spot rate: ¥116/$1.00

foward rate in a year: ¥109/$1.00

If we hedge the obligation using the forward rate:

750,000,000 /109 = 6,880,733.94495

forwards: U$D 6,880,733.95 dollars

If we use the call option:

750,000,000 x 0.0086 dollars = 6.450.000‬

premium:

750,000,000 x 0.012/ cents =

750,000,000 x 0.00012 dollars=       90,000  

Total:                                              6,540,000