Bobcat a US based manufacturer of industrial equipment just purchased a korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,800 million. Won1,500 million has already been paid and the remaining won6,300 million is due in six months. The current spot rate is won1,103.28/$ and the 6 month foward rate is won1,103.28/$. The 6 month korean won interest rate is 12% per annum; The 6 month U.S. dollar rate is 5% per annum. Bobcat can invest at these interest rates or borrow at 1% per annum above those rates. A 6 month call option on won with a won1,100/$ strike rate has a 2.83% premium, while the 6 month put option at the same strike rate has a 2.48% premium.
Bobcat can invest at the rates given above, or borrow at 1% per annum above those rates. Bobcats weighted average ost of capital is 9%. Compare alternate ways that bobcat might deal with its foreign exchange exposure. What do you recommend and why?