Hensley Manufacturing Co. has purchased a robotic welding machine from a Japanese firm for ¥8 million and has to make payment in 60 days. The current spot exchange rate is ¥110.40/$ and the 60 day forward rate is ¥109.36/$. The corporate treasurer expects the yen to be at ¥115/$ in 60 days. Interest rates available to the firm are (invest/borrow) 2.6/4.2% p.a. in USD and 1.1/3.2% p.a. in Yen. The WACC for the firm is 12% p.a. The Treasurer is also considering using FX options to hedge this A/P. Call options with a strike of ¥110/$ and a premium of 3% and put options with a strike of ¥110/$ and a premium of 4% are available from the firm’s bank. Calculate the expected cost of the unhedged, forward contract, money market, and option hedges and make a recommendation.

Answer rating: 100% (QA)

1 Unhedged cost 8000000115 6956522 2 Forward contract 800000010936 7315289 3 Money market hedge Sinc... View the full answer