Use the Information for the Following Problem(s)

question 24

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. A ________ hedge allows Plains States to enjoy the benefits of a favorable change in exchange rates for their euro receivables contract while protecting the firm from unfavorable exchange rate changes.

• A) forward
• B) call option
• C) put option
• D) money market

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Definitions:

Factorial Designs

Experimental designs that allow investigation of the effects of multiple factors (independent variables) and their interactions on one or more outcomes (dependent variables).

Real-world Conditions

Circumstances or situations that occur in everyday life outside of controlled or laboratory settings.

Independent Variables

Variables that are manipulated or changed in an experiment to observe their effects on dependent variables.

Curvilinear Relationships

Relationships between two variables where the strength and/or direction of the association changes over the range of the variable's value, forming a curve rather than a straight line.