3)An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. Thefollowing data
Question:
3)An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. Thefollowing data is available:
Rates and prices in US-cents/CHF.
Spot rate: 71.42 cents/CHF
90-day forward rate: 71.14 cents/CHF
US -dollar 90-day interest rate: 3.75% per year
Swiss franc 90-day interest rate: 5.33% per year
Option Data in cents/CHF
_______________________________
StrikeCallPut
702.551.42
721.552.40
_______________________________
a)Assess the USD cost to the importer in 90 days if it uses a call option to hedge its CHF750,000 account payable. Use the call with a strike price of 72 cents/CHF and include the option call premium in the cost.
b)What will be the cost of the payable in 90 days if a forward contract is used?
c) By how much must the CHF weaken relative to the USD, from 71.42 cents/CHF before thecall option provides a lower cost than the forward hedge?