Use the Information for the Following Problem(s)

question 19

True/False

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.If Plains States purchases the put option,and the option expires in six months on the same day that Plains States receives the euro 1,250,000,the firm will exercise the put at that time if the spot rate is $1.43/euro.

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Definitions:

Standard Direct Materials

The predetermined cost and quantity of direct materials that are expected to be used in the production of a product.

Direct Materials Price

The cost per unit of raw materials used in the production of goods.

Standard Costs

predetermined costs assigned to goods and services, used as a benchmark for measuring performance.

Standard Price

The predetermined cost of acquiring goods and services, often used in budgeting and cost control.