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A US company has ordered watches from Switzerland that will require a payment of Swiss francs (CHF) 500,000 in three months. The expected spot prices
A US company has ordered watches from Switzerland that will require a payment of Swiss francs (CHF) 500,000 in three months. The expected spot prices to prevail in three months range from $1.00 to $1.12. The following information is available:
Spot rate $1.06/CHF 3-month forward rate $1.07/CHF Interest rate in US5.00% Interest rate in Switzerland2.00% Call option premium$0.040E=$1.06 Put Optionpremium$0.045E=$1.06
- How can the firm hedge using forward rates? Show the payoffs for the expected spot rates.
- How can the firm hedge using money market rates? Show the payoffs for the expected spot rates.
- How can the firm hedge using options. Show the payoffs for the expected spot rates.
Which hedging would you recommend
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