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

question 13

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. The cost of a put option to OTI would be ________.

• A) $52,500
• B) $55,388
• C) $58,275
• D) There is not enough information to answer this question.

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Definitions:

Pressure to Conform

Describes the influence exerted by a group that encourages individuals to change their attitudes, values, or behaviors to align with group norms.

Minority Domination

A situation where a smaller or less powerful group exercises disproportionate control or influence over decision-making processes or organizational directions.

Decision Making Takes Longer

A situation where the process of choosing between alternatives or making decisions is extended due to various factors, such as complexity or lack of information.

Information Technology (IT)

The use of computers, storage, networking, and other physical devices, infrastructure and processes to create, process, store, secure and exchange all forms of electronic data.