The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model that forecasts future spot exchange rates.

Finley, Incorporated, a maker and exporter of Fightin Blue Hen paraphernalia, has just received a large order from Kruse, AG, a large Swiss retailing chain. Delivery of the merchandise would occur in 2 years, and Finley wishes to determine the price in Swiss francs (CHF) to charge for the order. If the items were being sold for delivery today, Finley would want to receive $1.4 million, an amount that would recover all variable costs and make an acceptable contribution to overhead and profit. The current exchange rate between the dollar and the Swiss franc is $0.66/CHF. Finley expects that its (dollar) costs will rise at about 3 percent per year over the coming 2 years and would like to recover these cost increases in proportional increases in the contract price. The annual yield on 2-year Treasury bonds is 5.5 percent in the United States. Similar risk bonds sell to yield 4.5 percent annually in Switzerland. L012