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Use the Information for the Following Problem(s)

question 39

Multiple Choice

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)
∙ 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%
∙ 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 could hedge the Euro receivables in the money market.Using the information provided,how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S.investment rate?

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Definitions:

Relation

In mathematics and computer science, it is a set of ordered pairs, showing how two sets of objects are related to each other.

Supply

The total amount of a product or service that is available to consumers.

Quantity

The amount or number of a material or immaterial item counted or measured.

Prices

The amount of money required to purchase a good or service, typically determined by supply and demand in the market.