Question
Plasti-Grip, Inc. of Nebraska just purchased a Korean company that produces plastic nuts and bolts for automobile manufactures. The purchase price was for Won 7,030,000,000.
Plasti-Grip, Inc. of Nebraska just purchased a Korean company that produces plastic nuts and bolts for automobile manufactures. The purchase price was for Won 7,030,000,000. Won 1,000,000,000 has already been paid and the remaining Won 6,030,000,000 is due in six months. The current spot rate is Won 1,200/ $, the six-month forward rate is Won 1,260/ $. Additional data: Korean interest rate 16% annual US interest rate 4% annual Six month call option on Korean won @ strike price of Won 1,200/$ 3% premium Six month put option on Korean won @ strike price of Won 1,200/$ 2.4% premium Answer the following: a. Find the cost of a money market hedge b. Find the cost of a forward hedge c. Find the cost of an option hedge. What is the best and worse case? d. Compare the hedges in terms of costs. Which hedge would you recommend? e. At what exchange rate is the cost of the option just equal to the cost of the forward market hedge?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started