A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot rate is $.6698/SFr and the 90 day forward rate is $.6776/SFr.

90 day call option on SFr: strike=$.68, premium=$.0096

90 day put option on SFr: strike=$.68, premium=$.0105

Interest rates US Switz. Possible spot rate in 90 days

90 day deposit rate 3% 3% Spot Probability

90 day borrowing rate 3.2% 3.2% $.65 20%

$.67 20%

$.69 60%

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Calculate and explain the expected dollar cost of the payable for each of the following:

(1) FORWARD HEDGE: buy or sell francs forward?

(2) MONEY MARKET HEDGE: describe steps in hedging process

(3) OPTION HEDGE(S): Which option(s)? buy or sell?

(4) REMAINING UNHEDGED

Should the firm hedge? If so, how? Consider both cost and exchange rate risk in your decision. Compare cost/risk for each.

Your Word doc should include the following table:

Cost of Payable

Spot at expiration	$.65	$.67	$.69	Expected Cost
Forward
Money Market
Option
Option
Remain unhedged