Question

Xyz corporation, located in the united states, has an accounts payable obligation of ¥788 million payable in one year to a bank in tokyo. the current spot rate usdjpy = 105.5 and the one year forward rate is 104.5. the annual interest rate is 1.3 percent in japan and 2.6 percent in the united states. xyz can also buy a one-year call option on yen at the strike price of $0.0094 per yen for a premium of 0.041 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

Answer 1

To calculate the future dollar cost, we can consider two options: the forward exchange rate and the call option. Using the forward exchange rate, the future dollar cost is $82.556 million. Using the call option hedge, the future dollar cost is $7.72628 million.

Step-by-step explanation:

To calculate the future dollar cost of meeting the accounts payable obligation using the option hedge, we need to consider the two options available: forward exchange rate and call option. Let's calculate:

1. Forward Exchange Rate:

The future dollar cost can be calculated by multiplying the accounts payable obligation (¥788 million) by the one-year forward rate (104.5). So, the future dollar cost using the forward exchange rate is ¥788 million * 104.5 = $82.556 million.

2. Call Option:

To calculate the future dollar cost using the call option, we need to consider the premium paid for the option and the strike price:

The premium paid for the call option is 0.041 cents per yen, which is equivalent to $0.00041 per yen. The strike price is $0.0094 per yen.

So, the total cost of exercising the call option is the premium paid plus the strike price: $0.00041 + $0.0094 = $0.00981 per yen.

Now, we need to multiply the total cost per yen by the accounts payable obligation in yen: $0.00981 * ¥788 million = $7.72628 million.

Therefore, the future dollar cost of meeting the obligation using the call option hedge is $7.72628 million.