6. Caterpillar. Caterpillar (U.S.) just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,030 million. Won1,000 million has already been paid, and the remaining Won6,030 million is due in six months. The current spot rate is Won1200/$, and the six-month forward rate is Won1260/$. Additional data:

Caterpillar can invest at the rates given above, or borrow at 2% per annum above those rates. Cat's weighted average cost of capital is 10%. Compare alternate ways that Caterpillar might deal with its foreign exchange exposure. What do you recom- mend and why?

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Six-month Korean interest rate: Six-month US. interest rate Six-month call option on Korean won at W1200/$: Six-month put option on Korean won at W 200/$ 16.00% p.a. 4.00% pa 3.0% premium 24% premium