Central Valley Transit Inc. (CVI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 1,000,000. 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 $1.1/euro

The six month forward rate is $1.116/euro

CVT's cost of capital is 10% per year

The Euro zone 6-month borrowing rate is 5% per year

The Euro zone 6-month saving rate is 3% per year

The U.S. 6-month borrowing rate is 8% per year

The U.S. 6-month saving rate is 6% per year

December call options for euro with strike price $1.1/euro: premium price is 1%

CVT's forecast for 6-month spot rates is $1.11/euro

22) Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be:

A) $1,100,000.

B) $1,116,000.

C) 1,110,000.

D) unknown today

23) Refer to Instruction 10.1. CVT would be

by an amount equal to

than if they had NOT hedged and their predicted exchange rate for 6 months had been correct.

A) worse off; $6,000

B) better off; $6,000

C) worse off; 6,000

D) better off; 6,000

24) Refer to Instruction 10.1. What is the cost (in December's dollar value of a call option hedge for CVT's euro receivable contract?

A) $10.850

B) $11,150

C) $11,250 D) $11,550

25) Refer to Instruction 10.1. If CVT chooses to use money market to hedge the exchange rate risk, how much is CVT's total cost (in December's dollar value) to pay euro 1,000,000?

A) $1,063,832

B) $1,093,188

C) $1,102,124

D) 1,121,359