Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

If the spot exchange rate 6 months later, ST turns out to be $1.21/ , what is the payoff in 6 months of the accounts receivable hedged with the put option?

$1,453,126

$1,466,000

$1,468,333

$1,489,445

The spot exchange rate is $1.16/

The six month forward rate is $1.13/

Plains States' cost of capital is 12% per annum

The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)

The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)

TheU.S.6-month borrowing rate is 6% per annum (or 3% for 6 months)

TheU.S.6-month lending rate is 4.5% per annum (or 2.25% for 6 months)

December put options for625,000; strike price $1.17, premium price is 1.5%

Plains States' forecast for 6-month spot rates is $1.15/

The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/