Problem
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥658 million payable in one year to a bank in Tokyo. The current spot rate USDJPY = 105.50 and the one year forward rate is 104.25. The annual interest rate is 1.1 percent in Japan and 4.1 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0093 per yen for a premium of 0.040 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. What is the future dollar cost of meeting this obligation using the option hedge?