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Instruction 10.1: Use the Information for the Following Problem(s)

question 49

Multiple Choice

Instruction 10.1:
Use the information for the following problem(s) .
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for €3,000,000. The purchase 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, CVT 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 $1.250/euro
• The six-month forward rate is $1.22/euro
• CVT's 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 call options for euro 750,000; strike price $1.28, premium price is 1.5%
• CVT's forecast for 6-month spot rates is $1.27/euro
• The budget rate, or the highest acceptable purchase price for this project, is $3,900,000 or $1.30/euro
-Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be:

Definitions:

Balanced Scorecard

A management and planning methodology aimed at aligning organizational activities with its vision and strategy, enhancing communication both internally and externally, while tracking the organization's performance in relation to its strategic objectives.

Strategic Alignment

The process of aligning an organization's resources and actions with its strategic objectives to achieve long-term goals.

Target Forecasting

The process of estimating future sales, revenue, or other quantitative metrics based on historical data, market trends, and business analysis.

Replacement Selection

The process of identifying and selecting a candidate to replace an existing employee within an organization.