Based manufacturer of industrial equipment

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Reference no: EM132037370

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 8 500 million. Won1,000 million has already been paid, and the remaining Won7,500 million is due in six months. The current spot rate is Won1,107/$, and the 6-month forward rate is Won1,178/$. The 6-month Korean won interest rate is 16?% per annum, the 6-month U.S. 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 Won1,200/$ strike rate has a 3.8% premium, while the 6-month put option at the same strike rate has a 3.2?% 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 11.5?%. 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 Won1,107/$? Won1,178/$?

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 Won1,200?/$? to be Won1,300?/$?

e. What do you recommend?

Reference no: EM132037370

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