Bobcat, an American manufacturer of industrial equipment, has just bought a Korean company that produces plastic nuts
Question:
Bobcat, an American manufacturer of industrial equipment, has just bought a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7.8 billion. 1.5 billion won has already been paid, and the remaining 6.3 billion won is due in six months. The current spot rate is 1,103.28 won/$ and the 6-month forward rate is 1,103.28 won/$. The interest rate for the 6-month Korean won is 12% per year; The 6-month US dollar rate is 5% per year. Bobcat can invest at these interest rates or borrow at 1% per year above those rates. A 6-month call option on won with an exercise rate of $1,100 won has a premium of 2.83%,
Bobcat can invest at the rates listed above or borrow at 1% per annum above those rates. The Bobcats' weighted average equity OST is 9%. Compare alternative ways in which the wildcat could deal with its currency exposure. What do you recommend and why?
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett