Instruction 10.1: Use the Information for the Following Problem(s)

question 44

Multiple Choice

Instruction 10.1:
Use the information for the following problem(s) .
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for €3,000,000. 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, CVT 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 $1.250/euro
• The six-month forward rate is $1.22/euro
• CVT'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 750,000; strike price $1.28, premium price is 1.5%
• CVT's forecast for 6-month spot rates is $1.27/euro
• The budget rate, or the highest acceptable purchase price for this project, is $3,900,000 or $1.30/euro
-Refer to Instruction 10.1. The cost of a put option to CVT 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:

Infrastructure

The fundamental physical and organizational structures and facilities (e.g., buildings, roads, power supplies) needed for the operation of a society or enterprise.

Marketers

Professionals involved in the activities, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.

Global Entry Strategies

Techniques and methods businesses use to enter foreign markets, including exporting, licensing, franchising, or through joint ventures.

Significant Capital

Refers to a substantial amount of money or resources used by a company to fund significant investments or projects.