Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry ¥500 million payable in one year. The current spot rate is ¥124/$ and the one-year forward rate is ¥110/$. Interest rate is 5% per annum in Japan and 8% per annum in the U.S. The 1-year call option on ¥ at the strike price of $.0081/¥ currently sells for a premium of .014 cents per Yen.


(1) Construct forward hedge for PCC and calculate the future dollar cost of meeting its ¥ obligation using this hedge.


(2) Construct money market hedge (MMH) for PCC and calculate the future dollar cost of meeting its ¥ obligation using MMH.


(3) How to hedge PCC’s foreign currency exposure in option market? Conduct cash flow analysis to examine the result of option hedge.


(4) At what future spot rate will PCC be indifferent between option hedge and forward hedge? Explain.