XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million, due in one year to a Tokyo bank. The current spot rate is ¥116/$1, and the one-year forward rate is ¥109/$1. The annual interest rates are 3% in Japan and 6% in the United States. Additionally, XYZ can purchase a one-year call option on yen with a strike price of $0.0086 per yen and a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation through a money market hedge is...

 To calculate the future dollar cost of meeting the obligation through a money market hedge, XYZ Corporation would have to take the following steps:

1. Borrow the present value of the accounts payable amount in the foreign currency (Japanese yen), which is ¥750 million. 2. Convert this amount to USD at the current spot exchange rate of ¥116/$1. 3. Invest the USD amount at the domestic interest rate (6% in the United States) for one year. 4. After one year, use the matured investment to pay off the foreign currency (JPY) loan, which will have also accumulated interest at the foreign interest rate (3% in Japan).

Now let's calculate each step:

1. Calculate the present value amount that needs to be borrowed in JPY. You use the interest rate in Japan to discount the obligation: Present value = Future value / (1 + interest rate in Japan) Present value = ¥750 million / (1 + 0.03) Present value = ¥750 million / 1.03 Present value = approximately ¥728.16 million

2. Convert the present value to USD using the current spot rate: USD amount = JPY amount / Spot rate USD amount = ¥728.16 million / ¥116/$1 USD amount = approximately $6.28 million

3. Invest the USD amount at the US interest rate of 6% to grow to an amount that will cover the JPY loan in one year. Since the USD will appreciate against the JPY, we don't need to account for the full ¥750M but rather the present value in JPY we've just borrowed: Future value = Present value * (1 + interest rate in the US) Future value = $6.28 million * (1 + 0.06) Future value = $6.28 million * 1.06 Future value = approximately $6.657 million

4. This is the amount of dollars we need today to meet the obligation. However, we need to compare it to what we would have to pay with the forward market and option market approaches before deciding which is the best strategy.

For the purposes of your question, $6.657 million is the future dollar cost of meeting the ¥750 million obligation through a money market hedge.