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. The sale was priced in yen at ¥25,000,000, with payment due in three months. The exchange rate and interest rate data are shown in the following tables:
Spot exchange rate: ¥117.974/$
1-month forward rate: ¥117.505/$
3-month forward: ¥116.610/$
Money Rates United States Japan
One month 4.9125% 0.09500%
Three months 5.0000% 0.09500%
Krystal can be 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%, and the company wishes to protect the dollar value of this receivable.