(6) Karaoke Inc., a Japanese importing firm anticipates an outflow of $8.93 million in 6 months. Karaoke’s management te

[answerhappygod]

(6) Karaoke Inc., a Japanese importing firm anticipates an
outflow of $8.93 million in 6 months. Karaoke’s management team is
worried about the course of the ¥/$ exchange rate over the next 6
months and decides to hedge. The current spot and forward rates are
S0=121 ¥/$ and Ft=6 months = 125 ¥/$. The $-interest rate is 5.56%
and the ¥-interest rate is 0.48%.
a) Compute the ¥ cost to Karaoke Inc. if it hedges its position
using the forward market.
b) Compute the ¥ cost to Karaoke Inc. if it hedges its position
using the money market.
c) Which of the two (forward vs. money market) hedges is best
for Karaoke Inc.?
d) Alternatively, Karaoke Inc. is contemplating the use of an
options hedge. Sanwa bank is offering to Karaoke Inc. the following
options: Call option on $8.93 million at K=121 ¥/$, with a 3.3%
premium (price). Put option on $8.93 million at K=121 ¥/$, with a
2.75% premium (price). What is the cost of the option hedge? (Hint
: show the cost for the worst case scenario)
e) Compute the break-even rate between the options hedge and the
better one of the forward and money market hedges.