Krystal.Krystal is a U$.$S$.-$based company that manufactures, sells, and installs water purification equipment. On April $11,$ the company sold a system to the City of Nagasaki, Japan, for installation in Nagasaki's famous Glover Gardens $($where Puccini's Madame Butterfly waited for the return of Lt$.$ Pinkerton$).$ The sale was priced in yen at $22,000,000,$ with payment due in three months. The exchange rate and interest rate data are shown in the popup window: $($Pic bellow$).$ Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot $117\mathrm{.}626/$$$,$ for example, is a mid$-$point range. On April $11,$ the spot yen traded in London from $118\mathrm{.}638/$$ to $116\mathrm{.}614/$$$.$ Krystal's Japanese competitors are currently borrowing yen from Japanese banks at a spread of two percentage points above the Japanese money rate. Krystal's weighted average cost of capital is $17\%,$ and the company wishes to protect the dollar value of this receivable$\mathrm{.}3-$month options are available from Kyushu Bank: call option on $22,000,000$ at exercise price of $117\mathrm{.}000/$$: a $1\mathrm{.}2\%$ premium; or a put option on $22,000,000,$ at exercise price of $117\mathrm{.}000/$$: a $3\mathrm{.}5\%$ premium.

a$.$ What are the costs and benefits of alternative hedges?

Which would you recommend, and why?

b$.$ What is the break$-$even reinvestment rate when comparing forward and money market alternatives?