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 comma 8007,800

million. Won1,000 million has already been paid, and the remaining

Won6 comma 8006,800

million is due in six months. The current spot rate is

Won1 comma 1191,119/$,

and the 6-month forward rate is

Won1 comma 1691,169/$.

The 6-month Korean won interest rate is

1717%

per annum, the 6-month U.S. dollar rate is

4.54.5%

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 comma 2001,200/$

strike rate has a

3.73.7%

premium, while the 6-month put option at the same strike rate has a

3.03.0%

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

11.511.5%.

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 comma 1191,119/$?

Won1 comma 1691,169/$?

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

Won1 comma 2001,200/$?

To be

Won1 comma 3001,300/$?

e. What do you recommend?