Procter and Gamble's affiliate in India, P&G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge an 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like P&G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy.

Spot rate:.........................................¥120.60/$

180-day forward rate.........................¥2.400/Rps

Expected spot, 180 days.........................¥2.6000

180-day Indian rupee investing rate............8.000%

180-day Japanese yen investing rate............1.500%

Currency agent's exchange rate..................4.850%

P&G India's cost of capital.....................12.000%