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

W7,500 million. W1,000 million has already been paid,

and the remaining W6,500 million is due in six months.

The current spot rate is W1,110/$, and the 6-month

forward rate is W1,175/$. The 6-month Korean

won interest rate is 16% per annum, 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. A 6-month call option on won with

a W1,200/$ strike rate has a 3.0% premium, while the

6-month put option at the same strike rate has a 2.4%

premium.

Bobcat can invest at the rates given above, or

borrow at 2% per annum above those rates. Bobcats

weighted average cost of capital is 10%. Compare

alternate ways that Bobcat might deal with its for-

eign exchange exposure. What do you recommend

and why?

(Please give step-by-step instructions and show what formula can be used to calculate it)