Question

Bobcat Company.  Bobcat​ Company, U.S.-based manufacturer of industrial​ equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won 8,000 million.​ Won1,000 million has already been​ paid, and the remaining Won 7,000 million is due in six months. The current spot rate is Won 1,112​/$, and the​ 6-month forward rate is Won1,173​/$. The​ 6-month Korean won interest rate is 15​% per​ annum, the​ 6-month U.S. dollar rate is 3.5​% per annum. Bobcat can invest at these interest​ rates, or borrow at​ 2% per annum above those rates. A​ 6-month call option on won with a Won1,200​/$ strike rate has a 4.5% premium, while the​ 6-month put option at the same strike rate has a 3.8%premium.

Bobcat can invest at the rates given​ above, or borrow at​ 2% per annum above those rates.​ Bobcat's weighted average cost of capital is10​%.Compare alternate ways below that Bobcat might deal with its foreign exchange exposure.  

a. How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be Won1,112​/$? Won1,173​/$?

b. How much in U.S. dollars will Bobcat pay in 6 months with a forward market​ hedge?

c. How much in U.S. dollars will Bobcat pay in 6 months with a money market​ hedge?

d. How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than Won1,200/$? To be Won 1,300​/$?

e. What do you​ recommend?

Answer 1