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

question 32

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. OTI would be ________ by an amount equal to ________ with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct.

Definitions:

Borderline Personality Disorder

A psychological condition marked by widespread fluctuations in emotions, relationships with others, sense of self, and actions.

Self-Inflicted Lacerations

Cuts or injuries that an individual deliberately inflicts on their own body, often as a coping mechanism for emotional distress.

Antisocial Personality Disorder

A mental health disorder characterized by a disregard for other people, chronic antisocial behavior, and lack of remorse.

Callous Attitude

An insensitive and emotionally detached demeanor that shows a lack of empathy or concern for others.