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 64,000,000, payable as 62,000,000 on August 1 and 62,000,000 on November 1. Larkin derived its price quote of 64,000,000 on April 1 by dividing its normal U.S. dollar sales price of $4,200,000 by the then current spot rate of $1.0500/E. By the time the order was recelved and booked on May 1, the euro had strengthened to $1.0800/6, so the sali, wa in fact worth 64,000,000$1.0800/E=$4,320,000. Larkin had already gained an extra $120,000 from favorable exchangc rata 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 $1.0860/6 and the 6-month forward quote was $1.0930/6. b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of its U.S. bark at 8.46% per annum. c. Hedge with foreign currency options: August put options were available at strike price of $1,0800f for a premium of 1.8% per contract, and November put options were available at $1.0800/ for a premium of 1.2%. August call options at $1.0800/ could be purchased for a premium of 2.8%, and November call options at $1.0800/ were available at a 2.6% premium. d. Do nothina: Larkin could wait until the sales broceeds were received in Aucust and November, hope the recent strenathenina of the euro would continue. a. How much in U.S. dollars will Larkin receive on November 1 st with a forward market hedge? (Round to the nearest dollar.) 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 64,000,000, payable as 62,000,000 on August 1 and 62,000,000 on November 1. Larkin derived its price quote of 64,000,000 on April 1 by dividing its normal U.S. dollar sales price of $4,200,000 by the then current spot rate of $1.0500/E. By the time the order was recelved and booked on May 1, the euro had strengthened to $1.0800/6, so the sali, wa in fact worth 64,000,000$1.0800/E=$4,320,000. Larkin had already gained an extra $120,000 from favorable exchangc rata 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 $1.0860/6 and the 6-month forward quote was $1.0930/6. b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of its U.S. bark at 8.46% per annum. c. Hedge with foreign currency options: August put options were available at strike price of $1,0800f for a premium of 1.8% per contract, and November put options were available at $1.0800/ for a premium of 1.2%. August call options at $1.0800/ could be purchased for a premium of 2.8%, and November call options at $1.0800/ were available at a 2.6% premium. d. Do nothina: Larkin could wait until the sales broceeds were received in Aucust and November, hope the recent strenathenina of the euro would continue. a. How much in U.S. dollars will Larkin receive on November 1 st with a forward market hedge? (Round to the nearest dollar.)
