Alpha Company, U.S.-based manufacturer of industrial equipment, just purchased a Koreancompany that produces plastic nuts and bolts for heavy equipment. The purchase price wasWon7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 millionis due in six months. The current spot rate is Won1,110/S, and the 6-month forward rate isWonl,175/S. The six-month Korean won interest rate is 16% per annum, the six-month US dollarrate is 4% per annum. Alpha can invest at these interest rates, or borrow at 2% per annum abovethose rates. Alpha's weighted average cost of capital is 10%. Given this information, determinewhether a forward hedge or a money market hedge would be most appropriate. Please show yourwork!

i) Amount of dollars to be paid if covered under Forward Hedge: = Amount payable * Forward rate =…

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!

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Y2

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