10.7 Singflux. Singflux is a Singapore-based company that manufactures, sells, and installs water-treatment plants. On June 1, the company sold a water-treat- ment plant to the City of Hiroshima, Japan, for installation in Hiroshima's famous cherry blossom gardens. The sale was priced in yen at ¥100,000,000, with payment due in three months. Spot exchange rate: ¥80.31/S$ (closing mid-rates) 1- month forward rate: 79.96/S$, a 5.25% per annum premium 3-month forward: ¥79.14/S$. a 5.91% per annum premium 1-year forward: ¥74.87/S$, a 7.27% per annum premium Money Rates One month Three months Twelve months Singapore 5.9850% 6.1895% 7.9515% Japan 0.0695% 0.0695% 0.1505% Differential 5.9155% 6.1200% 7.8010% Note that the interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The spot ¥80.31/S$, for example, is a mid-point range. On June 1, the spot yen traded in London from ¥80.36/S$ to ¥79.86/S$. Singflux's Japanese com- petitors are currently borrowing from Japanese banks at a spread of one percentage point above the Japanese money rate. Singflux's weighted average cost of capital is 10%, and the company wishes to protect the Singapore dollar value of this receivable. These 3-month options are available from Kokoda Bank: a call option on ¥100,000,000 at exercise price of ¥80.00/5$: a 1% premium; or a put option on ¥100,000,000, at exercise price of ¥80.00/5$: a 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?