Question

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The maximum future dollar cost of meeting this obligation using the call option is

Answer 1

Answer:

The maximum future dollar cost of meeting this obligation using the call option is $6,545,400

Explanation:

payable obligation = 750,000,000 YEN

premium payable on call option = 750,000,000*0.012

                                                      = $90,000

the interest rate is 6%

future value of call option premium = $90,000(1+0.06)

                                                           = $95,400

As the expected future spot price is 109 YEN per dollar which is higher than exercise price of $0.0086

Amount payable under call option = (750,000,000*$0.0086)+$95400

                                                          = $6,545,400

Therefore, The maximum future dollar cost of meeting this obligation using the call option is $6,545,400