Question

Bobcat Company. Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,900 million. Won 1,000 million has already been paid, and the remaining Won6,900 million is due in six months. The current spot rate is Won1,114/$, and the 6-month forward rate is Won1,161/$. The 6-month Korean won interest rate is 16% per annum, the 6-month U.S. dollar rate is 3% per annum. Bobcat can invest at these interest rates, or borrow at 2% per annum above those rates. A 6-month call option on won with a Won1,200/$ strike rate has a 3.7% premium, while the 6-month put option at the same strike rate has a 3.0% premium

Bobcat can invest at the rates given above, or borrow at 2% per annum above those rates. Bobcat's weighted average cost of capital is 11%. Compare alternate ways below that Bobcat might deal with its foreign exchange exposure.

a. How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be Won1,114/$? Won 1,161/$?

b. How much in U.S. dollars will Bobcat pay in 6 months with a forward market hedge?

c. How much in U.S. dollars will Bobcat pay in 6 months with a money market hedge?

d. How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than Won 1,200/$? To be Won 1,300/$?

e. What do you recommend?

Answer 1

Date Requirement = Won 6900 million Page Anues (1) SR = Win 1114/4 FR = Non 1161/$ 1 x Intuis Rates Korcan US 16% pa ti 2% 3% pa pg 2x - 18%.pa = 51.pa * forth call optim - Won 1200/8 EP 8 3 74 pomem * WACC = 11% un 1 us Pollars to be paid if s » Won £124/6 om uolo Obligation = Won 6900 millon... pad = 6900 millon 1114 = US Dollars & be C|1234/02 (6.193 million $1) n .= ³ (5-9 43 lus a a n CA 1161/5 million $1 6900 million 1161 A forward market Hedge » 6mth forward Rak = Won 1161) a US Dollas to be paids 6900 million 1161 (5.943 millim Escanned with CamScanner

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