A U.S. MNC expects to receive ¥750 million from its customer one year from now. The current spot rate is ¥116/$ and the one-year forward rate is ¥109/$. The annual interest rate is 3% on ¥ and 6% on USD. The put option on ¥ at the strike price of $0.0086/¥ with 1-year expiration costs 0.012 cent/¥, while the call option on ¥ at the strike price of $0.0080/¥ with 1-year expiration costs 0.009 cent/¥.

1) At what future spot rate MMH is better than option hedging?

2) At what forward rate MMH is worse than forward hedging?

3) How to hedge the ¥750 million receivable if the payment by its customer is uncertain?

Answer rating: 100% (QA)

SOLUTION 1 To determine at what future spot rate MMH Money Market Hedge is better than option hedging we need to compare the cost of MMH with the cost of option hedging MMH involves borrowing in one c... View the full answer