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 Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1100/$, and the 6-month forward rate is Won1175/$. The six-month Korean won interest rate is 4% per annum, the six-month US dollar rate is 2% per annum. Bobcat can invest at these interest rates, or borrow at 2% per annum above those rates. A six-month call option on won with a 1,000/$ strike rate has a 2.5% premium, while the six-month put option at the same strike rate has a 1.0% 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 10%.

Assumptions Values

Purchase price of Korean manufacturer, in Korean won 7,500,000,000

Less initial payment, in Korean won (1,000,000,000)

Net settlement needed, in Korean won, in six months 6,500,000,000

Current spot rate (Won/$) 1100

Six month forward rate (Won/$) 1175

Bobcat's cost of capital (WACC) 10.00%

Options on Korean won: Call Option Put Option

Strike price, won 1,000.00 1,000.00

Option premium (percent) 2.50% 1.40%

United States Korea

Six-month investment (not borrowing) interest rate (per annum) 2.00% 4.00%

Borrowing premium of 2.000% 2.00% 2.00%

Six-month borrowing rate (per annum) 4.00% 6.00%

If Bobcat chooses NOT to hedge their won payable, assuming the Spot rate stays the same over the next 6-months, the amount they pay in US dollars six months will be: