Bobcat? 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 8100 million Won1,000 million has already been? paid, and the remaining 7,100 million won were due in 6 months. Spot rate is won 1100/$, 6 month forward rate 1,163/$, 6 month korean intrest rate is 15.5% per annum. The 6 month us dollar rate is 4.5% per annum. Bobcat can invest at these interest? rates, or borrow at? 2% per annum above those rates. A? 6-month call option on won with a won 1200/$ strike rate has 3.2 % premium. While 6 month put option has 2.6% premium.
Bobcat can invest at the rates given? above, or borrow at? 2% per annum above those rates.? Bobcat's weighted average cost of capital is 11%.
Compare alternate ways below that Bobcat might deal with its foreign exchange exposure.
a. How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be Won 1100?/$?
1163/$?
b. How much in U.S. dollars will Bobcat pay in 6 months with a forward market? hedge?
c. How much in U.S. dollars will Bobcat pay in 6 months with a money market? hedge?
d. How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than Won 1,200/$? To be Won1,300?/$?
e. What do you? recommend?