Instruction 9.2: Use the Information for Following Problem(s)

question 50

Multiple Choice

Instruction 9.2:
Use the information for following problem(s) .
Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 2,500,000. 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, OTI 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
∙ OTI'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 625,000; strike price $1.42, premium price is 1.5%
∙ OTI's forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the highest acceptable purchase price for this project, is
$3,625,000 or $1.45/euro
-Refer to Instruction 9.2. If OTI chooses not to hedge their euro payable, the amount they pay in six months will be ________.

• A) $3,500,000
• B) $3,450,000
• C) euro 3,450,000
• D) unknown today

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Definitions:

Gastrointestinal

Referring to the stomach and intestines, and related to the process of digestion and the management of diseases affecting this system.

Upper Respiratory

Pertaining to the upper part of the respiratory system, including the nose, throat, and trachea.

Seriation

Ability to order items along a dimension.

Class Inclusion

Understanding of the relationship between a whole and its parts.