An American insurance company issued $10 million of one-year, zero-coupon GICs (guaranteed investment contracts) denominated in Swiss

Question:

An American insurance company issued $10 million of one-year, zero-coupon GICs (guaranteed investment contracts) denominated in Swiss francs at a rate of 5 percent. The insurance company holds no SF denominated assets and has neither bought nor sold francs in the foreign exchange market.

a. What is the insurance company's net exposure in Swiss francs?

b. What is the insurance company's risk exposure to foreign fluctuations?

c. How can the insurance company use futures to hedge the risk exposure in part (b)? How can it use options to hedge?

d. If the on SF options is $0.6667/SF and the spot is $0.6452/SF, what is the intrinsic value (on expiration) of a call option on Swiss francs? What is the intrinsic value (on expiration) of a Swiss franc put option? (Note: Swiss franc futures options traded on the Chicago Mercantile Exchange are set at SF125,000 per contract.)

e. If the June delivery call option premium is 0.32 cents per franc and the June delivery put option is 10.7 cents per franc, what is the dollar premium cost per contract? Assume that today's date is April 15.

f. Why is the call option premium lower than the put option premium?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...