Instruction 11.2:Use the Information for the Following Problem(s)

question 39

Multiple Choice

Instruction 11.2:Use the information for the 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 11.2. 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; €1.40.

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Definitions:

Nonpersonal Selling

Marketing or promotional activities that do not involve direct face-to-face interaction with customers, such as advertising, social media, or email marketing.

Prestige Pricing

A pricing strategy where prices are set higher than average, reflecting the exclusive nature or superior quality of a product, to attract status-conscious consumers.

Integrated Marketing Communications

A strategic approach that combines various marketing methods, such as advertising, public relations, and digital marketing, to provide a consistent message across all platforms.

Promotional Strategies

Plans designed to advertise, market, and sell products or services to increase consumer engagement and sales.