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

question 37

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. OTI chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be ________.

Definitions:

Neuron

A specialized cell transmitting nerve impulses; the basic building block of the nervous system.

Lateralized

Refers to the tendency for some neural functions or cognitive processes to be more dominant in one hemisphere of the brain than the other.

Amygdala

A part of the brain involved in emotion regulation, especially fear and pleasure responses, as well as memory processing.

Asymmetry

Lack of equality or equivalence between parts or aspects of something; lack of symmetry.