John Deere Inc., Moline, Illinois manufacturer of farming equipment, just acquired a Seoul, South Korean...
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John Deere Inc., Moline, Illinois manufacturer of farming equipment, just acquired a Seoul, South Korean company that produces additives for farming operations. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/$. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. John Deere can invest at these interest rates or borrow at 2% per annum above those rates. A six-month call option on won with a 1200/$ strike rate has a 3.0% premium, while the six-month put option at the same strike rate has a 2.4% premium.
John Deere can invest at the rates given above, or borrow at 2% per annum above those rates. John Deere's weighted average cost of capital is 10%. Compare alternate ways that John Deere might deal with its foreign exchange exposure. What do you recommend and why?
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