Question
Bobcat Company. Bobcat Company, a U.S.-based industrial equipment manufacturer, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase
Bobcat Company. Bobcat Company, a U.S.-based industrial equipment manufacturer, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was KRW 7,500 million. KRW 1,000 million has already been paid, and the remaining KRW 6,500 million is due in six months. The current spot rate is KRW1,110/USD, and the 6-month forward rate is KRW1,175/USD. The 6-month Korean won interest rate is 16% per annum, and the 6-month U.S. dollar rate is 4% per annum. Bobcat can invest at these interest rates or borrow at 2% per annum above those rates.
Compare alternate ways that Bobcat might deal with its foreign exchange exposure.
How much will Bobcat pay in USD if it uses a forward contract? What is the strategy?
How much will Bobcat pay if it uses a Money Market Hedge? Make sure you consider the appropriate interest rate given transaction costs. Show the strategy and the associated cash flows. Make sure you divide the annual rates by two to estimate the effective monthly rates.
What do you recommend and why?
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