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

To calculate the future dollar cost of meeting the obligation using the option hedge, first, determine the cost per yen including the premium: $0.0086 + $0.00012 = $0.00872 per yen. Then, multiply this cost by the total yen obligation: $0.00872 * 750,000,000 yen = $6,540,000. However, this does not account for the premium paid upfront. The premium cost is 0.00012 * 750,000,000 = $90,000. Adding this to the initial calculation gives a total of $6,540,000 + $90,000 = $6,630,000. The correct calculation should closely match one of the provided options, but given the options and the calculation method, option B seems to be the closest match, suggesting a possible miscalculation in the explanation. The correct approach involves calculating the total cost including the premium for the option, but the precise numbers provided do not align perfectly with the calculation steps outlined, indicating a need for recalibration of the explanation or a closer examination of the correct calculation method for the option hedge cost.

XYZ Corporation,located in the United States,has an Accounts Payable Obligation