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

question 14

Multiple Choice

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

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