Question $1$: Read the case below to answer the questions that follow.

Consider the following transaction. Cummins, a Columbus, Indiana based engine

manufacturing company, has just finalized the sale of truck engines worth $29,050,000$ to the

Indian automobile company Tata Motors.

The sales contract calls for Tata Motors to pay the full amount of the contract in Indian

Rupees $6$ months from now. As CFO at Cummins you must advise the CEO of an appropriate

hedging strategy. You have three alternatives:

$1.$ Remain unhedged;

$2.$ Forward hedge; or

$3.$ Money market hedge

Additional Information:

Forward Market: The attached WSJ exchange rate table gives the following information.

U$.$S$.$ $ Equivalent

Indian Rupee

Today$$s Spot rate $80/$$

$6-$month forward $86/$$

Money Market: You have contacted Cummins$$ lead bank and they have offered you the

following information regarding interest rates:

$1.$ Indian borrowing interest rate: $10\%$ per year

$2.$ Indian investment interest rate: $6\%$ per year

$3.$ US borrowing interest rate: $5\%$ per year

$4.$ US investment interest rate: $3\%$ per year

$5.$ Cummins$$ internal cost of capital is $2\%$ per year

Key additional information: Your investment advisor predicts that the $6$ month spot rate will be

$88/$$

Evaluate the hedging alternatives $($unhedged; forward market; money market$)$ for your firm and

order them from most to least attractive as financial strategies. Justify your ordering with

reference to calculated proceeds as well as the risks and benefits of the alternatives. Make

sure you compare the earnings of the firm for each alternative to the other alternatives when

you order the strategies. Show ALL calculations and steps performed in your evaluation of the

alternatives. $($You may round numbers to the nearest decimal point$).$