36.

Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

The spot exchange rate is $1.40/

The six month forward rate is $1.38/

Plains States cost of capital is 11%

The Euro zone borrowing rate is 9% per annum (or 4.5% for 6 months)

The Euro zone lending rate is 7% per annum (or 3.5% for 6 months)

The U.S. borrowing rate is 8% per annum (or 4% for 6 months)

The U.S. lending rate is 6% per annum (or 3% for 6 months)

December put options for 625,000; strike price $.1.42, premium price is 1.5%

Plains States forecast for 6-month spot rates is $1.43/

The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/

Plains States could hedge the Euro receivables in the money market. Using the information provided, how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate?

Group of answer choices

$1,724,880

$1,250,000

none of the choices is correct

$1,207,371

$1,674,641