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XXX 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
XXX 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 Won 9,500 million. Won2,000 million has already been paid, and the remaining is due in three months. The current spot rate is Won1,120/\$, and the 3 -month forward rate is Won1,195/\$. The three-month Korean won interest rate is 20% per annum, the three-month US dollar rate is 8% per annum. XXX can invest at these interest rates, or borrow at 4% per annum above those rates. A three-month call option on won with a 1250/$ strike rate has a 3.0% premium, while the three-month put option at the same strike rate has a 2.4% premium. XXX's can invest at the rates given above, or borrow at 3% per annum above those rates. XXX's weighted average cost of capital is 12%. Compare alternate ways that XXX might deal with its foreign exchange exposure. What do you recommend and why
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