Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Caterpillar (U.S.) just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,030 million. Won1,000 million has

image text in transcribed

Caterpillar (U.S.) just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,030 million. Won1,000 million has already been paid, and the remaining Won6,030 million is due in six months. The current spot rate is Won1200/$, and the 6-month forward rate is Won1260/$

Caterpillar can invest at the rates given below, or borrow at 2% per annum above those rates. Caterpillar's weighted average cost of capital is 10%. Compare alternate ways that Cat might deal with its foreign exchange exposure.

image text in transcribed
Assumptions Values Purchase price of Korean manufacturer, in Korean won 7,030,000,000 Less initial payment, in Korean won (1,000,000,000) Net settlement needed, in Korean won, in six months 6,030,000,000 Current spot rate (Won/$) 1,200 Six month forward rate (Won/$) 1,260 Plasti-Grip's cost of capital (WACC) 10.00% Options on Korean won: Call Option Put Option Strike price, won 1,200.00 1,200.00 Option premium (percent) 3.000% 2.400% United States Korea Six-month investment (not borrowing) interest rate 4.000% 16.000% Borrowing premium of 2. 000% 2.000% 2.000% Six-month borrowing rate (per annum) 6.000% 18.000%

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_2

Step: 3

blur-text-image_3

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

Personal Finance

Authors: Jeff Madura, Hardeep Singh Gill

4th Canadian edition

134724712, 134724713, 9780134779782 , 978-0134724713

More Books

Students also viewed these Finance questions