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

Won7,700

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

Won6,700

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

Won1,107/$,

and the 6-month forward rate is

Won1,173/$.

The 6-month Korean won interest rate is

15.5%

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

Won1,200/$

strike rate has a

4.4%

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

3.7%

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

10%.

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

Won1,107/$?

Won1,173/$?

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

Won1,200/$?

To be

Won1,300/$?

e. What do you recommend?