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

question 55

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 to hedge its transaction exposure in the forward market, it will ________ euro 2,500,000 forward at a rate of ________.

• A) buy; $1.38
• B) buy; $1.40
• C) sell; $1.38
• D) sell; euro 1.40

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Definitions:

Job Recruitment

The process of attracting, screening, and selecting qualified people for a job or vacancy within an organization.

Job Synthesis

Job synthesis refers to the process of combining various job roles or tasks into a single, more comprehensive job position, often to increase efficiency or effectiveness within an organization.

Employee Recruiting

The proactive process of identifying, attracting, and selecting candidates for employment to fill current or future job vacancies within an organization.

Job Analysis

A systematic process of determining the skills, duties, and knowledge required for performing jobs in an organization, often used for recruitment and performance assessment.