CROWN Manufacturing has just signed a contract to sell agricultural equipment to Bosch, a German firm, for 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, CROWN is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. - The spot exchange rate is $1.1740/ - The six-month forward rate is $1.1480/ - CROWN's cost of capital is 12% per annum - The Eurozone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months) - The Eurozone 6-month lending rate is 5\% per annum (or 2.5% for 6 months) - The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months) - The U.S. 6-month lending rate is 4.5\% per annum (or 2.25% for 6 months) - December put options for 625,000; strike price $1.18, the premium price is 1.5% - CROWN's forecast for 6-month spot rates is $1.19/ - The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/ 1. If CROWN chooses not to hedge their euro receivable, the amount they receive in six months will be (a) $1,125,000 (b) $1,137,500 (c) $1,115,500 (d) undeterminable today 2. If CROWN chooses to hedge its transaction exposure in the forward market, the company will 1,250,000 forward at a rate of (a) sell; $1.148/ (b) sell; $0.8924/ (c) buy; $1.1740/ (d) buy; $0.8924/ 3. CROWN chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be (a) $1,467,500 (b) $1,125,000 (c) $1,435,000 (d) $1,425,000 4. If CROWN locks in the forward hedge at $.8750/, and the spot rate when the transaction was recorded on the books was $1.174/, this will result in a "foreign exchange loss" accounting transaction of (a) $0 (b) $32,500 (c) This was not a loss; it was a gain of $32,500. (d) There is not enough information to answer this question. 5. CROWN could hedge the Euro receivables in the money market. Using the information provided how much would the money market hedge return in six months assuming CROWN reinvests the proceeds at the U.S. investment rate? (a) $1,250,000 (b) $1,449,777 (c) $1,460,411 (d) $1,502,947 - December put options for 625,000; strike price $1.18, the premium price is 1.5% - CROWN's forecast for 6-month spot rates is $1.19/ - The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/ 1. If CROWN chooses not to hedge their euro receivable, the amount they receive in six months will be (a) $1,125,000 (b) $1,137,500 (c) $1,115,500 (d) undeterminable today 2. If CROWN chooses to hedge its transaction exposure in the forward market, the company will 1,250,000 forward at a rate of (a) sell; $1.148/ (b) sell; $0.8924/ (c) buy; $1.1740/ (d) buy; $0.8924/ 3. CROWN chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be (a) $1,467,500 (b) $1,125,000 (c) $1,435,000 (d) $1,425,000 4. If CROWN locks in the forward hedge at $.8750/, and the spot rate when the transaction was recorded on the books was $1.174/, this will result in a "foreign exchange loss" accounting transaction of (a) $0 (b) $32,500 (c) This was not a loss; it was a gain of $32,500. (d) There is not enough information to answer this question. 5. CROWN could hedge the Euro receivables in the money market. Using the information provided how much would the money market hedge return in six months assuming CROWN reinvests the proceeds at the U.S. investment rate? (a) $1,250,000 (b) $1,449,777 (c) $1,460,411 (d) $1,502,947 6. A hedge allows CROWN to enjoy the benefits of a favorable change in exchange rates for their Euro receivables contract while protecting the firm from unfavorable exchange rate changes. (a) forward (b) call option (c) put option (d) money market 7. What is the cost of a put option hedge for CROWN's Euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.) (a) $23,333 (b) $22,013 (c) 23,333 (d) 22,013 8. The cost of a call option to CROWN would be (a) $23,333 (b) $22,013 (c) $24,265 (d) There is not enough information to answer this