Bobcat Inc. a US-based manufacturer of heavy Industrial equipment just sold the equipment for 5,600,000 to a company in the UK. According to the term of sale, the buyer is allowed to make a payment in 6 months (180 days). You need to help Bobcat at Inc. to explore different ways of hedging its receivable and to make a decision on what strategy is more beneficial

use:

Current spot rate $1.3511/

6-months forward rate $1.3597/

6-months expected FX rate $1.3620/

180-days investing rate in USA 2.4%

180-Days borrowing rate in the USA 4%.

180-DAY British investing rate 1.6%

180-day British borrowing rate. 3.6$

Bobcats WACC 12%

Premium PUT option 2%

Premium CALL option 2.5%

Call and Put options strike price $1.361/

Using the data above, you need to calculate:

a. For a money market hedge, find the amount you need to borrow or invest today in GBP?

b. For money market hedge, how much USD will you receive today from the exchange of the borrow GBP?

c. Calculate the total process of money market hedge in USD?

d. What option should Bobcat Inc. buy to hedge using options hedge? Call or Put

e. Calculate the cost of the option (option premium) in USD today?

f. Adjust the options cost for the Time Value of Money?

g. Find the total amount in USD Bobcat Inc, will receive in 6 months if the management chooses the option hedges is exercised?

h. What hedging strategy does Bobcats management have to choose?

• Money market hedging
• Forward hedging
• Option hedge