? The spot exchange rate is $1.250/euro 7 The six-month forward rate is $1.22/euro ? CVTS cost of capital is 11% ? The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ? The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ? The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ? The U.S. 6-month lending rate is 6% (or 3% for 6 months) 7 December call options for euro 750,000; strike price $1.20, premium price is 1.5% ? CVTs forecast for 6-month spot rates is $1.27leuro ? The budget rate, or the highest acceptable purchase price for this project, is $3,900.000 or $1.30/euro Refer to Instruction 10.1. CVT would be rate for 6 months had been corect. with a forward hedge than if they had NOT hedged and their predicted exchange by an amount equal to OA better off, e150,000 OB. worse off; $150,000 OC. worse of, €150,000 OD. better of $150,000
? The spot exchange rate is $1.250/euro 7 The six-month forward rate is $1.22/euro ? CVTS cost of capital is 11% ? The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ? The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ? The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ? The U.S. 6-month lending rate is 6% (or 3% for 6 months) 7 December call options for euro 750,000; strike price $1.20, premium price is 1.5% ? CVTs forecast for 6-month spot rates is $1.27leuro ? The budget rate, or the highest acceptable purchase price for this project, is $3,900.000 or $1.30/euro Refer to Instruction 10.1. CVT would be rate for 6 months had been corect. with a forward hedge than if they had NOT hedged and their predicted exchange by an amount equal to OA better off, e150,000 OB. worse off; $150,000 OC. worse of, €150,000 OD. better of $150,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
M3
Transcribed Image Text:Instruction 10.1:
Use the information for the following problem(s).
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars froma manufacturer in Germany for €3,000,000. The purchase was made in June
with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is
considering several hedging altematives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the
following information.
? The spot exchange rate is $1.250/euro
? The six - month forward rate is $1.22/euro
7 CVTS cost of capital is 11%
? The Euro zone 6- month bokowing rate is 9% (or 4.5% for 6 months)
7 The Euro zone 6- month lending rate is 7% (or 3.5% for 6 months)
? The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
OA better oft, €150,000
OB. worse off, $150,000
OC. worse off, €150,000
OD. better off, $150,000
ut
en
Next
? The spot exchange rate is $1.250/euro
7 The six-month forward rate is $1.22/euro
? CVTS cost of capital is 11%
7 The Euro zone 6- month borrowing rate is 9% (or 4.5% for 6 months)
? The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
? The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
? The U.S. 6-month lending rate is 6% (or 3% for 6 months)
? December call options for euro 750,000; strike price $1.28, premium price is 1.5%
? CVTS forecast for 6-month spot rates is $1.27leuro
? The budget rate, or the highest acceptable purchase price for this project, is $3,900.000 or $1.30/euro
Refer to Instruction 10.1. CVT would be
rate for 6 months had been correct.
by an amount equal to
with a forward hedge than if they had NOT hedged and their predicted exchange
OA. better off €150,000
OB. worse off: $150,000
O C. worse off, €150.000
D. better off $150,000
ur
ni
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