JOHN DEERE 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, JOHN DEERE 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/

JOHN DEERE's cost of capital is 12% per year.

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

The Euro zone 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, premium price is 1.5%

JOHN DEERE'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/

JOHN DEERE would be by an amount equal to with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

(a) better off; $52,500

(b) better off; $10,000

(c) worse off; $52,500

(d) worse off: $10,000