Use the Information for the Following Problem(s)

question 57

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.The cost of a call option to Plains States would be ________.

• A)$17,653
• B)$16,733
• C)$18,471
• D)There is not enough information to answer this question.

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Definitions:

Gray Matter

Regions of the brain and spinal cord that are primarily made up of neuronal cell bodies and are involved in muscle control and sensory perception such as seeing and hearing, memory, emotions, and decision making.

Myelinated Axons

Axons that are covered with a fatty substance called myelin, which increases the speed at which electrical impulses propagate along the nerve cell.

Unmyelinated Axons

Nerve fibers lacking a myelin sheath, resulting in slower signal transmission compared to myelinated axons.

Electrochemical Impulses

Biological signals that neurons use to communicate information through an electrical charge transfer across their membrane.