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

question 44

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. The cost of a put option to CVT would be:

Definitions:

Mosses

Small, non-vascular plants that typically form dense green clumps or mats, often in damp or shady locations.

Lichens

Symbiotic associations between a fungus and a photosynthetic partner, usually an algae or cyanobacteria, which live together as a single, unique organism.

Sedges

A family of grass-like plants, often found in wet grounds, distinguished by their edges (edges, sedges) and triangular stems.

Ocean Zones

The division of the ocean into different layers or regions, typically based on depth, light penetration, distance from the shoreline, and ecological characteristics.