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Problem 1: Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:
Assume that analysts consider the following likely future spot exchange rate scenarios each with an equal probability of occurance (i.e. 33.3%)(Hint: Use statistical expectation to calculate the expected cost)
Strong Dollar: $0.8600 Neutral :$0.8750 Weak Dollar :$0.9500
Assume that Oregon selected to use December call option.What will be the expected cost of the rail cars?
$2,237,500
$2,204,035
$2,160,527
$2,270,965
$2,283,750
None of the above
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