Question

In: Accounting

PLEASE SHOW WORK Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes...

PLEASE SHOW WORK

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 124 yen per dollar and the one-year forward rate is 110 yen per dollar. The annual interest rate is 5% in Japan and 8% in the U.S. PCC can also buy a one-year call option on yen at the strike price of $.0081 per yen for a premium of .014 cents per yen.

(a) Compute the future dollar costs of meeting this obligation using the money market hedge and the forward hedges.

(b) Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used.

(c) At what future spot rate do you think PCC may be indifferent between the option and forward hedge?

PLEASE SHOW WORK

Solutions

Expert Solution

Answer a) Compute the future dollar costs of meeting this obligation using the money market hedge and the forward hedges.
In the case of forward hedge, the $ cost will be
500,000,000/110 yeb per dollar = $4,545,455
In case of monety market hedge, the future dollar cost will be :
500,000,000(1.08)/(1.05)(124)=$4,147,465
Answer b) Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used.
option premium 500,000,000*0.014% =$70,000
Future value will be $70,000*1.08 =$75,600
Expected future spot rate $0.0091 (=1/110) Higher than the exercise of $0.0081, PCC will exercise its call option
and buy ¥ 500,000,000.00 for $4,050,000 ($500,000,000 *.0081)
Exptected cost will thus be $4,124,600, which is the sum of $ 75,600 and $4,050,000
Answer c) At what future spot rate do you think PCC may be indifferent between the option and forward hedge?
When the option hedge is used, PCC will spend at $4,125,000. On the other, when the forwar hedging is used, PCC will have to spend $4,545,455 regardless of the future spot rate. means that the option hedge dominates the forward hedge. At no future spot rate, PCC will be indifferent between forward and option hedges

Related Solutions

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry...
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 124 yen per dollar and the one-year forward rate is 110 yen per dollar. The annual interest rate is 5% in Japan and 8% in the U.S. PCC can also buy a one-year call option on yen at the strike price of $.0081 per yen for a premium of .014 cents per yen....
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry...
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 124 yen per dollar and the one-year forward rate is 110 yen per dollar. The annual interest rate is 5% in Japan and 8% in the U.S. PCC can also buy a one-year call option on yen at the strike price of $.0081 per yen for a premium of .014 cents per yen....
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry...
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry ¥500 million payable in one year. The current spot rate is ¥124/$ 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 $.0081/¥ currently sells for a premium of .014 cents per Yen. (1) Construct forward hedge for PCC and calculate...
Question 1 Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million...
Question 1 Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable in one year. The current spot rate is ¥124/$ and the one-year forward rate is 110¥/$. The annual interest rate is in Japan is 5% for lending and 6% for borrowing; and in the United States it is 7% for lending and 8% for borrowing. The WACC is 7%. PCC can also buy a one-year call option on yen at the strike...
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable...
Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry for 500 million yen payable in one year. The current spot rate is ¥124/$ and the one-year forward rate is 110¥/$. The annual interest rate is in Japan is 5% for lending and 6% for borrowing; and in the United States it is 7% for lending and 8% for borrowing. The WACC is 7%. PCC can also buy a one-year call option on yen at the strike price of...
Costa Cruise Lines (CCL) (a U.S. company based in Miami, FL) purchased a ship from Komatsu...
Costa Cruise Lines (CCL) (a U.S. company based in Miami, FL) purchased a ship from Komatsu Heavy Equipment for ¥700 million – payable in 1 year.  The current spot rate is ¥110/$ and the one-year forward rate is ¥108/$.   For borrowing (or depositing), the annual interest rate in Japan is 6%.  In the United States, the rate is 2%. Yen call and put options, with a 1-year expiration date and an exercise price of $.009 are available. The price (premium) of the...
Costa Cruise Lines (CCL) (a U.S. company based in Miami, FL) purchased a ship from Komatsu...
Costa Cruise Lines (CCL) (a U.S. company based in Miami, FL) purchased a ship from Komatsu Heavy Equipment for ¥700 million – payable in 1 year. The current spot rate is ¥110/$ and the one-year forward rate is ¥108/$. For borrowing (or depositing), the annual interest rate in Japan is 6%. In the United States, the rate is 2%. Yen call and put options, with a 1-year expiration date and an exercise price of $.009 are available. The price (premium)...
Travel Inc. sells tickets for a Caribbean cruise to Carmel Company employees. The total cruise package costs Carmel $70,000 from Ship A way Cruise liner.
Travel Inc. sells tickets for a Caribbean cruise to Carmel Company employees. The total cruise package costs Carmel $70,000 from Ship A way Cruise liner. Travel Inc. receives a commission of 6% of the total price. Travel Inc., therefore, remits $65,800 to Ship A way. Prepare the entry to record the revenue recognized by Travel Inc. on this transaction.
PLEASE SHOW YOUR WORK! Hadley Company purchased an asset with a list price of $132,140. Hadley...
PLEASE SHOW YOUR WORK! Hadley Company purchased an asset with a list price of $132,140. Hadley paid $729 of transportation-in cost, $655 to train an employee to operate the equipment, and $503 to insure the asset against theft after it has been set up in the factory. The asset was purchased under terms 1/20/n30 and Hadley paid for the asset within the discount period. Based on this information, Hadley would capitalize the asset on its books at what dollar amount?...
please show work QUESTION 42 1. A company purchased $3300 worth of merchandise. Transportation costs were...
please show work QUESTION 42 1. A company purchased $3300 worth of merchandise. Transportation costs were an additional $290. The company returned $230 worth of merchandise and then paid the invoice within the 3% cash discount period. The total cost of this merchandise is: $3267.90. $3360.00. $3261.00. $3240.00. $3093.00. Q 1. A company's current assets are $28,920, its quick assets are $16,090 and its current liabilities are $12,770. Its acid-test ratio equals: 1.26. 2.26. 1.23. 0.79. 0.44. Q Wiley Hill...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT