An FI must make a single payment of $500,000$ Swiss francs in six months at the maturity of a CD$.$ The

FI's in$-$house analyst expects the spot price of the franc to remain stable at the current $$\frac{1\mathrm{.}02}{S}Fr.$ But

as a precaution, the analyst is concerned that it could rise as high as $$\frac{1\mathrm{.}07}{S}Fr$ or fall as low as

$$\frac{0\mathrm{.}97}{?}$ SFr$.$ Because of this uncertainty, the analyst recommends that the FI hedge the CD payment

using either options or futures. Six$-$month call and put options on the Swiss franc with an exercise

price of $$\frac{1\mathrm{.}02}{S}Fr$ are trading at $4$ cents and $2$ cents per $SFr,$ respectively. A six$-$month futures

contract on the Swiss franc is trading at $$\frac{1\mathrm{.}02}{S}Fr.$

a$.$ Should the analyst be worried about the dollar depreciating or appreciating?

b$.$ If the FI decides to hedge using options, should the FI buy put or call options to hedge the CD

payment? Why?

c$.$ If futures are used to hedge, should the FI buy or sell Swiss franc futures to hedge the payment?

Why?

d$.$ What will be the net payment on the CD if the selected call or put options are used to hedge the

payment? Assume the following three scenarios: the spot price in six months will be $$0\mathrm{.}97,$$$1\mathrm{.}02,$

or $$\frac{1\mathrm{.}07}{?}$ SFr$.$ Also assume that the options will be exercised.

e$.$ What will be the net payment if futures had been used to hedge the CD payment? Use the same

three scenarios as in part $($d$).$

f$.$ Which method of hedging is preferable after the fact?