Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,250,000. 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. The spot exchange rate is $.8924/ The six month forward rate is $.8750/ Plains States cost of capital is 11% The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) The U.S. 6-month lending rate is 6% (or 3% for 6 months) December put options for 625,000; strike price $.90, premium price is 1.5% (of spot exchange rate; that is, the premium is 1.5% of spot rate per Euro) Plains States forecast for 6-month spot rates is $.91/ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $.86/

a) If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be _____________. A. $1,125,000 B. $1,137,500 C. $1,115,500 D. undeterminable today

b) If Plains States chooses to hedge its transaction exposure in the forward market, it will __________ 1,250,000 forward at a rate of ___________. A. sell; $.8750/ B. sell; $.8924/ C. buy; $.8750/ D. buy; $.8924/

c) Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be __________. A. $1,137,500 B. $1,125,000 C. $1,093,750 D. $1,075,000

d) Plains States would be ____________ by an amount equal to ____________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct. A. better off; $43,750 B. better off; $62,500 C. worse off; $43,750 D. worse off; $62,500

e) Plains States could hedge the Euro receivables in the money market. Using the information provided, how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate? A. $1,196,172.25 B. $1,099,488.04 C. $1,067,464.11 D. $1,207,371.00

f) A _________ hedge allows Plains States to enjoy the benefits of a favorable change in exchange rates for their Euro receivables contract while protecting the firm from unfavorable exchange rate changes. A. forward B. call option C. put option D. money market

g) What is the cost of a put option hedge for Plains States Euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firms cost of capital as the appropriate interest rate for calculating future values.) A. $17,653 B. $16,733 C. 17,653 D. 16,733

h) If Plains States purchased the put option, and the option expires in six months on the same day that Plains States receives the 1,250,000, the firm will exercise the put at that time if the spot rate is $.91/. A. True B. False

i) If Plains States purchased the put option, and the option expires in six months on the same day that Plains States receives the 1,250,000. If the spot rate turns out to be $0.91/, what is the net revenue in $ that the firm receive from sales contract? (the premium paid to buy the options need to be considered)

j) If Plains States purchased the put option, and the option expires in six months on the same day that Plains States receives the 1,250,000. If the spot rate turns out to be $0.86/, what is the net revenue in $ that the firm receive from sales contract? (the premium paid to buy the options need to be considered)