SOLVE PARTS C AND D OF THIS PROBLEM:

Given the following example/ guide on how to do the problem:

C:

D:

Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterplillar (U.S), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for 4,400,000, payable as 2,200,000 on August 1 and 2,200,000 on November 1 . Larkin derived its price quote of 4,400,000 on April 1 by dividing its normal U.S. dollar saies price of $4,796,000 by the then current spot rate of $1.0900/E. By the time the order was received and booked on May 1, the euro had strengthened to $1.1200/,50 the sale was in fact worth 4,400,000$1,1200/=$4,928,000. Larkin had already gained an extra $132,000 from favorable exchange rate movements. Nevertheless, Larkin's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible: a. Hedge in the forward market: The 3-month forward exchange quote was \$1.1260/ and the 6-month forward quote was $1.1340/E, b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of its U.S. bank at 9.43% per annum. c. Hedge with foreign currency options: August put options were avaliable at strike price of $1.1200/ for a premium of 2.0% per contract, and November put options were available at $1.1200/ f for a premium of 1.2%. August call options at $1.1200/ could be purchased for a premium of 3.0%, and November call options at $1.1200/E were available at a 2.6% premium. d. Do nothing: Larkin could wait until the sales proceeds were received in August and November, hope the recent strengthening of the euro would continue, and sell the euros recelved for dollars in the spot market. Larkin estimates the cost of equity capital to be 12.5% per annum. As a small firm, Larkin Hydraulics is unable to raise funds with long-term debt. U.S. T-bills yield 3.8% per annum. What should Larkin do? a. How much in U.S, dollars will Larkin recelve on November ist with a forward market hedge? 1 (Round to the nearest dollar.) b. How much in U.S. dollars will Larkin recelve on November 1st with a money market hedge? (Round to the nearest dollar.) Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compre to Rebecke-Terwilleger Company of the Netherlands for 4,600,000, payable as 2,300,000 on August 1 and 2,300,000 on N Larkin derived its price quote of 4,600,000 on April 1 by dividing its normal U.S. dollar sales price of $4,830,000 by the then $1.0500/6. By the time the order was received and booked on May 1, the euro had strengthened to $1.1000/, so the sale was in fact wor 4,600,000$1.1000/=$5,060,000. Larkin had already gained an extra $230,000 from favorable exchange rate movements Larkin's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four appr were possible: a. Hedge in the forward market: The 3-month forward exchange quote was $1.1080/ and the 6-month forward quote was $1.1 b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of its U.S. bank at 9.67% per annum. c. Hedge with foreign currency options: August put options were available at strike price of $1.1000/ for a premium of 1.9% pe November put options were available at $1.1000/ for a premium of 1.4%. Auqust call options at $1.1000/ could be purchase paid up front. Its value carried forward 6 months at the firm's cost of capital of 13.5%, would raise its end of period cost to: Optionpremiumin6months=accountsreceivablepremiumratespotrate(1+2costofcapital) If the spot rate in 3 months is less than the strike rate of $1.1000/, the put option would be exercised. The amount of proceeds Larkin will receive on November 1 st from the 3 -month put option is computed as follows: Proceeds=[accountsreceivablexstrikeratex(1+costofcapital)]-antionnremiumin6months Print Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for 4,600,000, payable as 2,300,000 on August 1 and 2,300,000 on November 1 . Larkin derived its price quote of 4,600,000 on April 1 by dividing its normal U.S. dollar sales price of $4,830,000 by the then current spot rate $1.0500/6. By the time the order was received and booked on May 1, the euro had strengthened to $1.1000/, so the sale was in fact worth 4,600,000$1.1000/=$5,060,000. Larkin had already gained an extra $230,000 from favorable exchange rate movements. Nevertheless Larkin's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible: a. Hedge in the forward market: The 3-month forward exchange quote was $1.1080/ and the 6-month forward quote was $1.1150/, b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of its U.S. bank at 9.67% per annum. c. Hedge with foreign currency options: August put options were avalable at strike price of $1.1000/ for a premium of 1.9% per contract, and November out options were available at $1.1000/ for a oremium of 1.4%. Auoust call ootions at $1.1000/ could be purchased for a premiur Optionpremiumin6months=accountsreceivablepremiumratespotrate(1+2costofcapital) If the spot rate in 3 months is less than the strike rate of $1.1000/, the put option would be exercised. The amount of proceeds in U.S. dollars Larkin will receive on November 1 st from the 3 -month put option is computed as follows: Proceeds=[(1+4costofcapital)]-optionpremiumin6months Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidlary of Caterpillar (U.S.). sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for 4,600,000, payable as 2,300,000 on August 1 and 2,300,000 on November 1 . Larkin derived its price quote of 4,600,000 on April 1 by dividing its normal U.S. dollat sales price of $4,830,000 by the then current spot rate of $1.0500/. By the time the order was recoived and booked on May 1, the euro had strengthened to $1.1000/, so the sale was in fact worth 4,600,000$1,1000/=$5,060,000. Larkin had already gained an extra $230,000 from favorable exchange rate movements. Nevertheless, Larkin's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible: a. Hedge in the forward market: The 3 -month forward exchango quole was $1.1080/ and the 6 -month forward quote was $1.1150/. b. Hedge in the money market: Larkin could borrow ouros from the Frankfurt branch of its U.S. bank at 9.67% per annum. c. Hedge with foreign currency options: August put options were available at strike price of $1.1000/ for a premium of 1.9% per contract, and Proceeds=[accountsreceivablestrikerate(1+4costofcapital)]optionpremiumin6months If the put option would be exercised, the amount of proceeds in U.S. dollars Larkin will receive on November 1 st from the 6 -month put option is computed as follows: Proceeds =( accounts receivable strike rate ) - option premium in 6 months Thus, the total procceds Larkin will receive on November 1 st from the option market hedge will be the sum of the two put options. Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for 4,600,000, payable as 2,300,000 on August 1 and 2,300,000 on November 1 . Larkin derived its price quote of 4,600,000 on April 1 by dividing its normal U.S. dollar sales price of $4,830,000 by the then current spot rate $1.0500/6. By the time the order was received and booked on May 1, the euro had strengthened to $1.1000/, so the sale was in fact worth 4,600,000$1.1000/=$5,060,000. Larkin had already gained an extra $230,000 from favorable exchange rate movements. Nevertheless, Larkin's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible: a. Hedge in the forward market: The 3-month forward exchange quote was $1.1080/ and the 6 -month forward quote was $1.1150/. b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of its U.S. bank at 9.67% per annum. c. Hedge with foreign currency options: August put options were available at strike price of $1.1000/E for a premium of 1.9% per contract, and November put options were avallable at $1.1000/ for a premium of 1.4%. Auqust call options at $1.1000/ could be purchased for a oremium d. Larkin could wait 3 months to receive the first payment in euors and exchange euros for dollars at that time and carry the dollars over for another 3 months. The amount of proceeds in U.S. dollars Larkin will receive on November 1 st from the payment received on August 1 st is computed as follows: Proceeds=accountsreceivablespotratein3months(1+4costofcapital) Larkin could wait 6 months to receive the seicond payment in euors and exchange euros for dollars at the prevaling spot rate on November is Proceeds = accounts receivable spot rate in 6 months