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.
-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:
A) $6,450,000
B) $6,545,400
C) $6,653,833
D) $6,880,734

Question

Quizplus · Accepted Answer

Option premium = ($0.0012/100) × ¥750,000,000= $90,000The future value of the option premium is:= $90,000(1.06)= $95,400At the expected future spot rate of $0.0092 (= 1/109), which is higher than the exercise price of $0.0086, XYZ will exercise its call option and buy ¥750,000,000 for $6,450,000 (= ¥750,000,000 × $0.0086).The total expected cost will be:= $6,450,000 + $95,400= $6,545,400

XYZ Corporation, Located in the United States, Has an Accounts