Question: Perfect Purchase is a U.S. electronics retailer importing consumer electronics from Japan. The company will need 10 million yen () in one year to pay

Perfect Purchase is a U.S. electronics retailer importing consumer electronics from Japan. The company will need 10 million yen () in one year to pay its suppliers.

The firm expects the following exchange rate scenarios and probabilities:

Scenario Spot rate in one year Probability
A $0.0081 0.1
B $0.0089 0.5
C $0.0097 0.4

A call option on yen expiring in one year costs $0.00035 per yen and has an strike price of $0.0089 per yen.

Attempt 1/3 for 5 pts.

Part 1

What is the total cost of hedging your payables with a call option (in $)?

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