Larkin Hydraulics-please answer all parts of the question correctly for a thumbs up. Thank you and
take care!
Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.),
sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for
4,000,000, payable as 2,000,000 on August 1 and 2,000,000 on November 1 . Larkin derived its
price quote of 4,000,000 on April 1 by dividing its normal U.S. dollar sales price of $4,280,000 by
the then current spot rate of $1.0700/. By the time the order was received and booked on May 1 ,
the euro had strengthened to $1.1200/, so the sale was in fact worth 4,000,000$1.1200/=$4,480,
000. Larkin had already gained an extra $200,000 from favorable exchange rate movements.
Nevertheless, Larkin's director of finance now wondered if the firm should hedge against a
reversal of the recent trend of the euro. Four approaches were possible: a. Hedge in the forward
market: The 3-month forward exchange quote was $1.1280/ and the 6-month forward quote was
$1.1340/. b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of
its U.S. bank at 8.13% per annum. c. Hedge with foreign currency options: August put options
were available at strike price of $1.1200/ for a premium of 1.8% per contract, and November put
options were available at $1.1200/ for a premium of 1.6%. August call options at $1.1200/ could be
purchased for a premium of 2.8%, and November call options at $1.1200/ were available at a
3.0% premium. d. Do nothing: Larkin could wait until the sales proceeds were received in August
and November, hope the recent strengthening of the euro would continue, and sell the euros
received for dollars in the spot market..
Larkin Hydraulicsplease answer all parts of the question co.pdf
1. Larkin Hydraulics-please answer all parts of the question correctly for a thumbs up. Thank you and
take care!
Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.),
sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for
4,000,000, payable as 2,000,000 on August 1 and 2,000,000 on November 1 . Larkin derived its
price quote of 4,000,000 on April 1 by dividing its normal U.S. dollar sales price of $4,280,000 by
the then current spot rate of $1.0700/. By the time the order was received and booked on May 1 ,
the euro had strengthened to $1.1200/, so the sale was in fact worth 4,000,000$1.1200/=$4,480,
000. Larkin had already gained an extra $200,000 from favorable exchange rate movements.
Nevertheless, Larkin's director of finance now wondered if the firm should hedge against a
reversal of the recent trend of the euro. Four approaches were possible: a. Hedge in the forward
market: The 3-month forward exchange quote was $1.1280/ and the 6-month forward quote was
$1.1340/. b. Hedge in the money market: Larkin could borrow euros from the Frankfurt branch of
its U.S. bank at 8.13% per annum. c. Hedge with foreign currency options: August put options
were available at strike price of $1.1200/ for a premium of 1.8% per contract, and November put
options were available at $1.1200/ for a premium of 1.6%. August call options at $1.1200/ could be
purchased for a premium of 2.8%, and November call options at $1.1200/ were available at a
3.0% premium. d. Do nothing: Larkin could wait until the sales proceeds were received in August
and November, hope the recent strengthening of the euro would continue, and sell the euros
received for dollars in the spot market.
