Use the Information for the Following Problem(s)

question 66

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.If Plains States chooses to implement a money market hedge for the Euro receivables,how much money will the firm borrow today?

• A)euro 1,201,923
• B)$1,201,923
• C)euro 1,196,172
• D)$1,196,172

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Definitions:

NLRB

National Labor Relations Board, a US federal agency that enforces US labor law in relation to collective bargaining and unfair labor practices.

Collective Bargaining

The process in which working people, through their unions, negotiate contracts with their employers to determine their terms of employment.

Disparate Treatment

A form of discrimination where individuals are treated differently based on prohibited factors such as race, gender, age, etc., in similar situations.

Discriminatory Conduct

Actions or behaviors that unjustly differentiate among individuals, often based on race, age, sex, or religion.