Question
Najafi Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was
Najafi Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was KRW8218973, which is due in six months. The current spot rate is KRW1,110=USD1.00, and the 6-month forward rate is KRW1,175=USD1.00. The 6-month Korean won interest rate is 16% per annum, the 6-month U.S. dollar rate is 4% per annum. Najafi can invest at these interest rates, or borrow at 2% per annum above those rates. A 6-month call option on won with a KRW1,200=USD1.00 strike rate has a 3.0% premium, while the 6-month put option at the same strike rate has a 2.4% premium. Najafi's weighted average cost of capital is 10%. How much in U.S. dollars will Najafi pay in 6 months if Najafi enters into an option hedge and ends up exercising the option? Round to the nearest whole number.
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