Question

GM US just purchased a Korean company that produces nuts and bolts for heavy car manufacturing...

GM US just purchased a Korean company that produces nuts and bolts for heavy car manufacturing equipment. The purchase price was Won 8,500 million. Won1,000 million has already been paid, and the remaining Won7,500 million is due in six months. The current spot rate is Won1,115/$, and the 6-month forward rate is Won1,185/$. The six-month Korean won interest rate is 16% pe annum, the six-month US dollar rate is 4% per annum. GM 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.

GM can invest at the rates given above or borrow at 3% per annum above those rates. GM's weighted average cost of capital is 11%. Compare alternate ways that GM might deal with its foreign exchange exposure.

Calculate the cost of settlement in six months (US$) for Money market hedge.

A

$6,570,752

B

$5,693,193

C

$6,570,527

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Answer #1

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