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.

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%