Reference no: EM132974879

Question - Trident, a U.S.-based MNC, has just signed a contract to buy agricultural equipment from Plains Manufacturing for euro 1,250,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm, Trident is considering several hedging alternatives to reduce the exchange rate risk arising from the purchase. To help the firm make a hedging decision you have gathered the following information.

-The spot exchange rate is $1.40/euro

-Trident's cost of capital is 11%

-The six-month forward rate is $1.38/euro

-The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)

-The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)

-The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)

-The U.S. 6-month lending rate is 6% (or 3% for 6 months)

-December put options for euro 625,000; strike price $1.42, premium price is 1.5%

-December call options for euro 625,000; strike price $1.41, premium price is 1.3%

-Trident's forecast for 6-month spot rates is $1.43/euro. If Trident chooses to implement a money market hedge for the Euro payable, what's the cost to the firm today?