Question
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
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%
______________________________________________________________________
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 |
|
|
|
|
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Corporate Finance
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
13th International Edition
1265533199, 978-1265533199
