Answer Happy

Seattle Solar Corporation (SSC) based in the U.S. regularly
purchases solar generators from a Japanese firm. SSC is allowed to
settle a payment of JPY 1,000 million in 180 days.
Exhibit 1: Additional data
Spot exchange rate (JPY/USD)
116.00
180-day forward rate (JPY/USD)
118.00
Expected spot rate in 180 days (JPY/USD)
120.00
180-day USD interest rate per annum
3.0%
180-day JPY interest rate per annum
1.0%
SSC’s WACC per annum
4.0%
(1A) If SSC maintains an unhedged position, how much
will the firm need to pay if the spot rate in 180 days is the same
as (i) the current spot rate, and (ii) the expected spot rate?
[6 marks]
(1B) Suppose SSC plans to manage the possible
transaction exposure by hedging in the forward market or the money
markets. Determine which hedging alternative would be better for
SSC. [9 marks]
(1C) Suppose the strike price of a 180-day call option
for JPY 1,000 million is JPY/USD 119.00, and the premium of the
call option is 1.5%. Is hedging in the option market a better
alternative for SSC? [9 marks]