A U.S company needs to pay to her overseas supplier in Switzerland in three months. Use the following information to answer the questions.

Total Payable in Swiss Franc (SF): SF13,000

Exchange rate:

Spot rate: $1.02/SF

3-month call option:

Exercise price: $1.05/SF Premium: $0.05/SF

3-month interest rate:

U.S.: 8 0 % Switzerland: 6.8%

a) What is the total cost of investing in the option for the total payable if the future spot rate is similar to the 3-month forward rate? Include the opportunity cost of interest earned in the period.

(3 marks)

b) What should be your decision on the option if the future spot rate is less than the exercise exchange rate on the maturity date?

c) What is the total payable in Swiss Franc based on your decision in part (b)?

(3 marks) (4 marks)

d) What is the future spot exchange rate that will generate the same result for forward and option market hedges?

(3 marks)

e) If purchasing power parity (PPP) is hold, do you think the changes of exchange rate would affect the U.S companys competitive positions and its operating exposure.

(4 marks)

f) Explain ONE (1) benefit of using currency option compared with forward contract. (3 marks)

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