Use the Information for the Following Problem(s)

question 21

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 implement a money market hedge for the Euro receivables, how much money will the firm borrow today?

• A) euro 1,201,923
• B) $1,201,923
• C) euro 1,196,172
• D) $1,196,172

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Definitions:

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A defense mechanism where an individual refuses to accept reality or facts, often to avoid dealing with uncomfortable feelings or emotions.

Husband

A married man considered in relation to his spouse.

Savings

In learning and memory, the measure of efficiency in relearning material previously learned and partially or completely forgotten.

Avoidance-Avoidance Conflict

A mental struggle that arises when an individual is forced to decide between two equally undesirable alternatives.