Larkin Hydraulics.$$On May$1,$ Larkin$$ Hydraulics, a wholly owned subsidiary of Caterpillar$($U$.$S$.),$ sold a$12-$megawatt compression turbine to$$ Rebecke$-$Terwilleger Company of the Netherlands for euro$4$ comma $800$ comma $000,$ payable as euro$2$ comma $400$ comma $000$ on August $1$ and euro$2$ comma $400$ comma $000$ on November $1.$ Larkin derived its price quote of euro$4$ comma $800$ comma $000$ on April $1$ by dividing its normal U$.$S$.$ dollar sales price of $$$$4$ comma $944$ comma $000$ by the then current spot rate of $$$$1\mathrm{.}0300/$euro$.$

By the time the order was received and booked on May$1,$ the euro had strengthened to $$$$1\mathrm{.}0800/$euro$,$ so the sale was in fact worth euro $4$ comma $800$ comma $000$ times $ $1\mathrm{.}0800$ divided by euro equals $ $5$ comma $184$ comma $000.$ Larkin had already gained an extra $$$$240$ comma $000$ from favorable exchange rate movements.$$ Nevertheless, Larkin's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were$$ possible:

a$.$ Hedge in the forward$$ market: The$3-$month forward exchange quote was $$$$1\mathrm{.}0860/$euro and the$6-$month forward quote was $$$$1\mathrm{.}0940/$euro$.$

b$.$ Hedge in the money$$ market: Larkin could borrow euros from the Frankfurt branch of its U$.$S$.$ bank at $9\mathrm{.}99\%$ per annum.

c$.$ Hedge with foreign currency$$ options: August put options were available at strike price of $$$$1\mathrm{.}0800/$euro for a premium of $1\mathrm{.}8\%$ per$$ contract, and November put options were available at $$$$1\mathrm{.}0800/$euro for a premium of $1\mathrm{.}3\%.$ August call options at $ $1\mathrm{.}0800$ divided by euro could be purchased for a premium of $2\mathrm{.}8\%,$ and November call options at $$$$1\mathrm{.}0800/$euro were available at a $2\mathrm{.}7\%$ premium.

d$.$ Do$$ nothing: Larkin could wait until the sales proceeds were received in August and$$ November, hope the recent strengthening of the euro would$$ continue, and sell the euros received for dollars in the spot market.

Larkin estimates the cost of equity capital to be $12\mathrm{.}5\%$ per annum. As a small$$ firm, Larkin Hydraulics is unable to raise funds with$$ long$-$term debt. U$.$S$.$ T$-$bills yield $3\mathrm{.}4\%$ per annum. What should Larkin$$ do$?$

Question content area bottom

Part $1$

a$.$ How much in U$.$S$.$ dollars will Larkin receive on November $1$st with a forward market$$ hedge?

$$$

$$

enter your response here$($Round to the nearest$$ dollar.$)$

Part $2$

b$.$ How much in U$.$S$.$ dollars will Larkin receive on November $1$st with a money market$$ hedge?

$$$

$$

enter your response here$($Round to the nearest$$ dollar.$)$

Part $3$

c$.$ How much in U$.$S$.$ dollars will Larkin receive on November $1$st with an option market hedge if the options are$$ excercised?$$

$$$

$$

enter your response here$($Round to the nearest$$ dollar.$)$

Part $4$

d$.$ How much in U$.$S$.$ dollars will Larkin receive on November $1$st without a hedge if the expected spot rate in $3$ months is $ $1\mathrm{.}0860$ divided by euro and in $6$ months is $$$$1\mathrm{.}0940/$euro$?$

$$$

$$

enter your response here$($Round to the nearest$$ dollar.$)$

Part $5$