1. An FI must make a single payment of 500,000 Swiss francs in six months at the maturity of a CD. The FI’s in-house analyst expects the spot price of the franc to remain stable at the current $0.80/Sf. But as a precaution, the analyst is concerned that it could rise as high as $0.85/Sf or fall as low as $0.75/Sf.

Because of this uncertainty, the analyst recommends that the FI hedge the CD payment using either options or futures. Six-month call and put options on the Swiss franc with an exercise price of $0.80/Sf are trading at 4 cents and 2 cents per Sf, respectively. A six-month futures contract on the Swiss franc is trading at $0.80/Sf.