Use the Information for the Following Problem(s)

question 27

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 would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

• A)better off; $43,750
• B)better off; $62,500
• C)worse off; $43,750
• D)worse off; $62,500

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Definitions:

Rheumatoid Arthritis

A chronic inflammatory disorder affecting joints, including those in the hands and feet, characterized by painful swelling leading to bone erosion and joint deformity.

Naphthalene

An aromatic hydrocarbon composed of two fused benzene rings, commonly found in mothballs and used in the production of dyes and plastics.

Aromatic

A class of hydrocarbons that contain one or more benzene rings in their molecular structure, known for their stability and fragrant properties.

Antiaromatic

Compounds that possess conjugated pi electron systems and are less stable due to their ring structure not fulfilling Hückel's rule for aromatic stability.