Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

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 Won7,800 million. Won 1,000 million has already been paid, and the remaining Won6,800 million is due in six months. The current spot rate is Won1,112/$, and the 6-month forward rate is Won1,163/$. The 6-month Korean won interest rate is 16% per annum, the 6-month U.S. dollar rate is 4.5% 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 3.6% 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 11%. 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 Won1,112/S? Won1,163/$? b. How much in U.S. dollars will Bobcat pay in 6 months with a forward market hedge? c. How much in U.S. dollars will Bobcat pay in 6 months with a money market hedge? d. How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than Won 1,200/$? To be Won1,300/$? e. What do you recommend? (..) 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 Won1,112/S? $ (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 assumed to be Won1,163/$? $ (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 Won1,200/$? $(Round to the nearest cent.) How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be Won1,300/$? $ (Round to the nearest cent.) e. What do you recommend? (Select from the drop-down menu.) The provides the lowest certain cost hedging method for payment settlement

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Project Finance

Authors: E.R. Yescombe

1st Edition

0127708510, 978-0127708515

More Books

Students also viewed these Finance questions

Question

Identify communication barriers and describe ways to remove them.

Answered: 1 week ago