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 7,900 million.​ Won 1,000 million has already been​paid, and the remaining Won 6,900 million is due in six months. The current spot rate is Won 1,119​/$, and the​ 6-month forward rate is Won 1,174​/$. The​ 6-month Korean won interest rate is 15.5​% 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 4.3% ​premium, while the​ 6-month put option at the same strike rate has a 3.7​% 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 is 10%. 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 Won 1,119​/$? ​$__  ​(Round to the nearest​ cent.)

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 Won 1,174​/$? ​$__  ​(Round to the nearest​ cent.)

b. How much in U.S. dollars will Bobcat pay in 6 months with a forward market​ hedge? ​$__  (Round to the nearest​ cent.)

c. How much in U.S. dollars will Bobcat pay in 6 months with a money market​ hedge? ​$__  (Round to the nearest​ cent.)

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 Won 1,200​/$? ​$__  ​(Round to the nearest​ cent.)

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 Won 1,300​/$? ​$__  (Round to the nearest​ cent.)

e.What do you​ recommend?

The ___ (unhedged position, option market hedge, money market hedge, forward market hedge) provides the lowest certain cost hedging method for payment settlement.  

Answer 1

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