Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 Won7,600 million. Won1,000 million has already been paid, and the remaining Won6,600 million is due in six months. The current spot rate is Won1,112/$, and the 6-month forward rate is Won1,177/$. The 6-month Korean won interest rate is 16.5% 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 3.8% premium, while the 6-month put option at the same strike rate has a 3.2% 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 12%. 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/$?

Won1,177/$?

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?

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

Step: 3

blur-text-image

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

Financial management theory and practice

Authors: Eugene F. Brigham and Michael C. Ehrhardt

12th Edition

978-0030243998, 30243998, 324422695, 978-0324422696

More Books

Students also viewed these Finance questions