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Aquatech is a U.S.-based company which manufactures, sells, and installs water purification equipment. On April...

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Accounting

Aquatech is a U.S.-based company which manufactures, sells, and installs water purification equipment. On April 11th the company sold a system to the City of Nagasaki, Japan, for installation in Nagasakis famous Glover Gardens (where Puccinis Madame Butterfly waited for the return of Lt. Pinkerton.) The sale was priced in yen at 20,000,000, with payment due in three months. The current spot rate is 118.255/$, the 1-month forward rate is 117.760/$, and the 3-month forward rate is 116.830/$. The 3-month Japanese interest rate is 9.5% per annum, the 3-month US dollar rate is 4.8% per annum. Aquatech can invest at these interest rates, or borrow at 2% per annum above those rates. A 3-month call option on yen with a 120/$ strike rate has a 3.5% premium, while the 3-month put option at the same strike rate has a 2.5% premium. Assume that 3-month later spot exchange rate will be is 122/$. Aquatechs weighted average cost of capital is 10%. Compare alternate ways that Aquatech might deal with its foreign exchange exposure. What do you recommend and why?

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