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 SFr-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 exchange rate 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 strike price on SFr options is $1.0425/SFr and the spot exchange rate is $1.0210/SFr, 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 SFr125,000 per contract.)

e. If the June delivery call option premium is 0.32 cent 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?