Question
Najafi Company.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
Najafi Company.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 million Korean won (KRW). KRW1,000 million has already been paid, and the remaining KRW million is due in six months. The current spot rate is KRWUSD1.00, and the 6-month forward rate is KRWUSD1.00. The 6-month Korean won interest rate is per annum, the 6-month U.S. dollar rate is % per annum. Najafi can invest at these interest rates, or borrow at per annum above those rates. A 6-month call option on won with a KRWUSD1.00 strike rate has a % premium, while the 6-month put option at the same strike rate has a % premium. Najafi's weighted average cost of capital is %. Compare alternate ways below that Najafi might deal with its foreign exchange exposure. a. How much in U.S. dollars will Najafi pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be KRWUSD1.00? KRWUSD1.00? b. How much in U.S. dollars will Najafi pay in 6 months with a forward market hedge? c. How much in U.S. dollars will Najafi pay in 6 months with a money market hedge? d. How much in U.S. dollars will Najafi pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than KRWUSD1.00? To be KRWUSD1.00?
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