Instruction 10.1: Use the information for the following problem(s). Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract fo the firm and because the contract is in euros rather than dollars, Plains States 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 followin information. The spot exchange rate is $1.40/euro • The six month forward rate is $1.38/euro • Plains States' cost of capital is 11% • 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 December put options for euro 625,000;strike price $1.42, premium price is 1.5% Plains States' forecast for 6-month spot rates is $1.43/euro The budget rate, or the lowest acceptable sales price for this project is $1,075,000 or $1.35/euro Refer to Instruction 10.1. Plains States would be by an amount equal to had not hedged and their predicted exchange rate for 6 months had been correct. O better off: $43,750 O better off; $62,500 O worse off; $43,750 O worse off: $62,500 with a forward hedge than if they
Instruction 10.1: Use the information for the following problem(s). Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract fo the firm and because the contract is in euros rather than dollars, Plains States 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 followin information. The spot exchange rate is $1.40/euro • The six month forward rate is $1.38/euro • Plains States' cost of capital is 11% • 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 December put options for euro 625,000;strike price $1.42, premium price is 1.5% Plains States' forecast for 6-month spot rates is $1.43/euro The budget rate, or the lowest acceptable sales price for this project is $1,075,000 or $1.35/euro Refer to Instruction 10.1. Plains States would be by an amount equal to had not hedged and their predicted exchange rate for 6 months had been correct. O better off: $43,750 O better off; $62,500 O worse off; $43,750 O worse off: $62,500 with a forward hedge than if they
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 54QA
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Transcribed Image Text:Instruction 10.1:
Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro
1,250,000. The sale 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, Plains States 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.
The spot exchange rate is $1.40/euro
The six month forward rate is $1.38/euro
Plains States' cost of capital is 11%
• 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
December put options for euro 625,000;strike price $1.42, premium price is 1.5%
• Plains States' forecast for 6-month spot rates is $1.43/euro
• The budget rate, or the lowest acceptable sales price for this project is $1,075,000 or $1.35/euro
Refer to Instruction 10.1. Plains States would be
by an amount equal to
had not hedged and their predicted exchange rate for 6 months had been correct.
O better off: $43,750
better off; $62,500
O worse off; $43,750
O worse off; $62,500
with a forward hedge than if they
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