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General Electric (GE) imported a manufacturing system from Mitsubishi Heavy Industry for 500 million payable in one year. The current spot rate is $.0088/ and the one-year forward rate is $.0086/. The annual interest rate is 5% in Japan and 8% in the U.S. GE can also buy a one-year call option on yen at the strike price of $.0085 per yen for a premium of .014 centsper yen (or $0.00014 per yen). Answer the following questions. You can write out your final answers only or show a short calculation.

A. Compute the future dollar costs of meeting this obligation using forward hedge.

B. Compute the future dollar costs of meeting this obligation using money market hedge.

C. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation if GE decides NOT to hedge?

D. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the total expected future dollar cost of meeting this obligation when the option hedge is used.

E. Based on the available information and your calculations above, what is your recommendation to GE for a best strategy (unhedged vs forward hedge vs money market hedge vs option hedge)? Please discuss all strategies (expected CFs and riskiness) to support your recommendation.

F. At what forward rate do you think GE may be indifferent between the money market hedge and forward hedge?

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