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Bobcat Inc. a US-based manufacturer of heavy Industrial equipment just sold the equipment for 5,600,000...

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Accounting

Bobcat Inc. a US-based manufacturer of heavy Industrial equipment just sold the equipment for 5,600,000 to a company in UK. According to the term of sale, the buyer is allowed to make a payment in 6 months (180 days). You need to help Bobcat at Inc. to explore different ways of hedging its receivable and to make a decision what strategy is more beneficial

use:

Current spot rate $1.3511/

6-months forward rate $1.3597/

6-months expected FX rate $1.3620/

180-days investing rate in USA 2.4%

180-Days borrowing rate in USA 4%.

180-DAY British investing rate 1.6%

180-day British borrowing rate. 3.6$

Bobcat s WACC 12%

Premium PUT option 2%

Premium CALL option 2.5%

Call and Put options strike price $1.361/

Using data above, you need to calculate:

a. Calculate the cost of the option (option premium) in USD today

b. Adjust the options cost for the Time Value of Money

c. Find the total amount in USD Bobcat Inc, will receive in 6 months, if the management chooses the option hedges is exercised?

d. What hedging strategy does the Bobcats management have to choose?

  • Money market hedging
  • Forward hedging
  • Option hedge

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