Question
Caterpillar Company (CAT), a U.S.-based manufacturer of industrial equipment, just purchased a German company that produces plastic nuts and bolts for heavy equipment. The purchase
Caterpillar Company (CAT), a U.S.-based manufacturer of industrial equipment, just purchased a German company that produces plastic nuts and bolts for heavy equipment. The purchase price was 100 million. 20 million has already been paid, and the remaining 80 million is due in six months. The current spot rate is $1.20/. The six-month euro interest rate is 7% per annum, while the six-month US dollar interest rate is 3% per annum. CAT can invest and borrow at these interest rates. A six-month call option on euro with a $1.22/ strike rate has a 1.0% premium, while the six-month put option on euro at the same strike rate has a 2.0% premium. CAT has a WACC of 12% per annum and uses its WACC to calculate opportunity cost.
If CAT decides to hedge the accounts payable (A/P) in the money market, what is CATs total dollar cost to settle this A/P in six months?
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