Instruction 10.1: Use the information for the following problem(s).

Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 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, Plains States 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 $1.40/euro

The six month forward rate is $1.38/euro

Plains States' cost of capital is 11%

The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)

The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)

The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)

The U.S. 6-month lending rate is 6% (or 3% for 6 months)

December put options for euro 625,000; strike price $1.42, premium price is 1.5%

Plains States' forecast for 6-month spot rates is $1.43/euro

1. Refer to Instruction 10.1. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be
2. Refer to Instruction 10.1. If Plains States chooses to hedge its transaction exposure in the forward market, it will ________ euro 1,250,000 forward at a rate of ________.
3. Refer to Instruction 10.1. Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be
4. Refer to Instruction 10.1. If Plains States locks in the forward hedge at $1.38/euro, and the spot rate when the transaction was recorded on the books was $1.40/euro, this will result in a "foreign exchange loss" accounting transaction of
5. Refer to Instruction 10.1. Plains States would be ________ (worse/better) off by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted
6. Refer to Instruction 10.1. If Plains States chooses to implement a money market hedge for the Euro receivables, how much money will the firm borrow today?
7. Refer to Instruction 10.1. Plains States 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 Plains States reinvests the proceeds at the U.S. investment rate?
8. Refer to Instruction 10.1. What is the cost of a put option hedge for Plains States' 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.)