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 $.6776/SFr. 90 day call option on SFr: 90 day put option on SFr: strike=$.68, premium=$.0096 strike=$.68, premium=$.0105 Interest rates 90 day deposit rate 90 day borrowing rate US Switz. 3% 3% 3.2% 3.2% Possible spot rate in 90 days Spot Probability $.65 20% $.67 20% $.69 60% 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: $.65 $.67 $.69 Expected Cost Cost of Payable Spot at expiration Forward Money Market Option Option Remain unhedged 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 $.6776/SFr. 90 day call option on SFr: 90 day put option on SFr: strike=$.68, premium=$.0096 strike=$.68, premium=$.0105 Interest rates 90 day deposit rate 90 day borrowing rate US Switz. 3% 3% 3.2% 3.2% Possible spot rate in 90 days Spot Probability $.65 20% $.67 20% $.69 60% 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: $.65 $.67 $.69 Expected Cost Cost of Payable Spot at expiration Forward Money Market Option Option Remain unhedged