Use the Information for the Following Problem(s)

question 28

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 9.1. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be

• A) $1,750,000.
• B) $1,250,000.
• C) $892,857.
• D) undeterminable today.

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Definitions:

Transition Phase

A period of change in which something transforms from one state or phase to another, often marked by significant shifts or developments.

Systematic Way

An organized and consistent method or approach to accomplishing tasks or solving problems.

Exploratory Phase

An initial stage in research or project development focused on investigating, experimenting, or gathering preliminary data without a predetermined outcome or hypothesis.