Question
obcat 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 Won7,500
obcat 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 Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/$. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Bobcat can invest at these interest rates, or borrow as the assumption in the table below. A six-month call option on won with a 1200/$ strike rate has a 3.0% premium, while the six-month put option at the same strike rate has a 2.4% premium.
Compare alternate ways that Bobcat might deal with its foreign exchange exposure. What do you recommend and why?
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