Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A conference organizer in the New Zealand is planning a large international event in Zurich Switzerland. He is being paid NZ $1,000,000 by his New

A conference organizer in the New Zealand is planning a large international event in Zurich Switzerland. He is being paid NZ $1,000,000 by his New Zealand sponsors of the event and will need to make a payment of CHf 500,000 for conference costs in 3-months time. (CHf is the symbol for Swiss francs).

He has the following alternatives to protect himself from adverse changes in the value of the franc in terms of the New Zealand dollar.

Alternative 1: Do nothing.

Alternative 2: Enter into a forward contract with a bank. The forward price of the franc in terms of the New Zealand dollar is NZ $1.75

Alternative 3: Acquire 5 CHf 100,000 European style franc options. The following is information regarding the options (the quotes are in New Zealand dollar per Swiss Franc)

Strike Price Premium

Put $1.73 $.04

Call $1.73 $.02

Also assume the interest rate on a 3-month loan in Auckland (where the organizer is located) is 1% (for the 3-month period).

The organizer believes that the franc could trade as low as NZ $1.56 and as high as $1.80 in 3 months time.

Given this information, please answer the following questions.

Part 1: Suppose the organizer decides on Alternative 1. If, in three months, the franc trades at the low end, he earns dollars in profit and dollars in profit if the franc trades on the high end. Record your answers without a comma.

Part 2: Suppose the organizer decides on Alternative 2.If, in three months, the franc trades at the low end, he earns dollars in profit and dollars in profit if the franc trades on the high end. Record your answers without a comma.

Part 3: Suppose the organizer decides on Alternative 3. If, in three months, the franc trades at the low end, he earns dollars in profit and dollars in profit if the franc trades on the high end. Record your answers without a comma.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions

Question

Describe new developments in the design of pay structures. page 475

Answered: 1 week ago