Use the Information for the Following Problem(s)

question 2

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 to hedge its transaction exposure in the forward market, it will ________ euro 1,250,000 forward at a rate of ________.

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

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Definitions:

Extrinsic Motivation

The drive to perform activities due to external rewards or pressures, rather than for the enjoyment of the activity itself.

Artifacts

Tangible or visible elements in an organization that represent its culture, such as language, attire, or symbols.

Kilmann-Saxton Culture-Gap

A model that identifies discrepancies between the existing and preferred organizational culture, often used to understand conflicts or challenges within companies.

Technical/Human Orientation

A theoretical perspective emphasizing the balance between technological skills and human social skills in organizational contexts.