Bobcat Company. Hobcat Company, U.S.-based manutacturer ot industrial equipment,
ID: 2800533 • Letter: B
Question
Bobcat Company. Hobcat Company, U.S.-based manutacturer ot industrial equipment, just purchased a Korean company that produces plastic nuts and boits tor heavy equipment. The purchase price was Won7,000 million. Won1,000 million has already been paid, and the remaining Won6,000 million is due in six months. The current spot rate is Won 1.100 S and the 6 month forward rate is Won 1,161/S The 6-month Korean won interest rate is 15% per annum, the 6-month US dollar rate is 4.5% per annum. Bobcat can invest at these interest rates, or borrow at 2% per annum above those rates 6 month call option on won with a won 1,20 S strike rate has a 4.1% premium, while the 6-month put option at the same strike rate has a 3.5% 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 11.5%. 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 Won1,100VS? Won1,161/S? 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 1,200i$? To be Won1,300VS? e. What do you recommend? a. How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be Won1,100vS? Round to the nearest cent.) How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 months is assumed to be Won1,161/5? Round to the nearest cent.) b. How much in U.S. dollars will Bobcat pay in 6 months with a forward market hedge? (Round to the nearest cent.) c. How much in U.S. dollars will Bobcat pay in 6 months with a money market hedge? (Round to the nearest cent.) d. How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be less than Won1,200S (Round to the nearest cent.) How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6 months is assumed to be Won1,300vS? (Round to the nearest cent.) e. What do you recommend? (Select from the drop-down menu.) The | provides the lowest certain cost hedging method for payment settlement.Explanation / Answer
Amount Due in 6 months =6,000 million Won
a.) Amount to be paid without a hedge @ Won 1100/$ =$6,000/1,100 million =$5.45 million
Amount to be paid without a hedge @ Won 1161/$ =$6,000/1,161 million =$5.17 million
b.) 6-Month Forward Rates =Won1161/$
With a forward market hedge, amount to be paid by Bobcat =$6,000/1,161 million =$5.17 million
c.) Using Money Market Hedge,
6-month Korean Interest Rate =15% or 7.50% for 6 months
6-month US interest Rate =4.50% or 2.25% for 6 months
Amount in Won required today if invested in Korea @15% =6,000/1.075 =5,581.39 million
(The proceeds of the investment will go to pay liability)
Equivalent amount in dollars required =$5,581.39/1100 =$5.07399 million
This amount will be boorowed at (4.50 + 2.0=6.50% p.a.) in USA
Amount to be paid to lender in 6 months =(1+0.0325)x5.07399 =$5.2389 million
d1.) Expected Spot Rate in 6 months < Won 1200/$
Premium on Won 1200/$ option at the time of purchase = 4.1%
Total Premium paid upfront in USD =$ 6,000/1200 x 0.041 =$0.205 million
Amount to be paid with option hedge @ Won 1200/$ = $6,000/1,200 million =$5.00 million
Total amount paid =$0.205 + 5.00 =$5.205 million
d2.) Expected Spot Rate in 6 months = Won 1300/$
Premium on Won 1300/$ option at the time of purchase = 4.1%
Total Premium paid upfront in USD =$ 6,000/1300 x 0.041 =$0.1892 million
Amount to be paid with option hedge @ Won 1300/$ = $6,000/1,300 million =$4.615 million
Total amount paid =$0.1892 + 4.615 =$4.80 million