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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 i 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: 6 Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot #117.835/$, for example, is a mid-point range. On April 11, the spot yen traded in London from 118.422 7$ to $117.247/$. 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 15.5%, and the company wishes to protect the dollar value of this receivable. 3-month options are available from Kyushu Bank: call option on 22,000,000 at exercise price of 117.000/$: a 1.1% premium; or a put option on 22,000,000, at exercise price of 117.000/5: a 3.3% premium. a. What are the costs and benefits of alternative hedges? Which would you recommend, and why? b. What is the break-even reinvestment rate when comparing forward and money market alternatives? Spot exchange rate: 117.835/$ (closing mid-rates) 1-month forward rate: 117.351/5, a 4.95% per annum premium 3-month forward: 116.354/5, a 5.09% per annum premium 1-year forward 110.908/5, a 6.25% per annum premium Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet. Money Rates United States Japan Differential One month 4.9375% 0.09500% 4.84250% Three months 4.9750% 0.09500% 4.88000% Twelve months 5.1000% 0.31375% 4.78625% Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet

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