Alpha 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 Won7,500 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/$, and the 6-month forward rate is Won1,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum above those rates. Alpha's weighted average cost of capital is 10%. Given this information, determine whether a forward hedge or a money market hedge would be most appropriate. Please show your work!
Alpha Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum above those rates. Alpha's weighted average cost of capital is 10%. Given this information, determine whether a forward hedge or a money market hedge would be most appropriate. Please show your work!
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter27: Multinational Financial Management
Section: Chapter Questions
Problem 11P: Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today’s...
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