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Determine whether a forward hedge or a money market hedge

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Problem 1: Alpha 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 Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/$. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum above those rates. Alpha's weighted average cost of capital is 10%. Given this information, determine whether a forward hedge or a money market hedge would be most appropriate.

Reference no: EM132957271

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