Put option hedge for plains states euro receivable contract

Assignment Help Financial Management

Reference no: EM132033911

Refer to Instruction. What is the cost of a put option hedge for Plains States' euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.)

A) $25,328

B) $33,233

C) €26,728

D) €25,548

Instruction:

Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,500,000. The sale 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, Plains States 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

• Plains States' cost of capital is 11%

• The Euro zone borrowing rate is 9% (or 4.5% for 6 months)

• The Euro zone lending rate is 7% (or 3.5% for 6 months)

• The U.S. borrowing rate is 8% (or 4% for 6 months)

• The U.S. lending rate is 6% (or 3% for 6 months)

• December put options for euro 1,500,000; strike price $1.42, premium price is 1.5%

• Plains States' forecast for 6-month spot rates is $1.43/euro

• The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro

Reference no: EM132033911

Questions Cloud

Investment during her current tax year : Kate is in the 15% tax bracket and has $29,000 available for investment during her current tax year.

Calculate the proposal NPV-IRR and NAB : Calculate the proposal's NPV, IRR, and NAB. Should the company shorten its payment terms?

What factors are important in long-term relationships : What factors are important in long-term relationships? What is a bank credit card?

Which state would result in the lowest state income tax : Which state would result in the lowest state income tax and therefore be the state you advise your client to base their business in?

Put option hedge for plains states euro receivable contract : Refer to Instruction. What is the cost of a put option hedge for Plains States' euro receivable contract?

How would you hedge position where you buy the call option : What is the option price today? How would you hedge a position where you buy the call option today?

What is the firm weighted average cost of capital : What is the firm's weighted average cost of capital if the debt-equity ratio is .55?

Fourth withdrawal of money : How much do you need to deposit in order to have $ 45 after the fourth withdrawal of money?

Determine range of the interest rate : Determine the range of the interest rate i for which the present value of Option 1 is less than the present value of Option 2.

User Account

All Pages