Question
An importer must pay in 6 months 1,000,000 CHF. Its reference currency is the euro. The various market conditions are as follows: - Spot exchange
An importer must pay in 6 months 1,000,000 CHF. Its reference currency is the euro. The various market conditions are as follows: - Spot exchange rate: EUR/CHF = 1.6000 - 6-month forward exchange rate: EUR/CHF = 1.6160 - 6-month interest rate in francs Swiss francs: 5% - 6-month interest rate in euros: 3% - 6-month call options in Swiss francs with euros: o Cost: 0.02 euro per Swiss franc o Strike price: EUR/ CHF = 1.6160
1) How can you hedge this position using an investment in Swiss francs so that you know exactly how many euros it costs in t=0?
2) How can you hedge this position using an investment in Swiss francs and a loan in euros so as to know exactly how many euros it costs in t=6 months?
3) How can you hedge this position using a futures contract?
4) How can you hedge this position using a currency option?
5) A priori, what is the most interesting cover?
Step by Step Solution
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1 To hedge this position using an investment in Swiss francs the importer can simply convert the required amount of euros 1000000 EUR into Swiss francs at the spot exchange rate of EURCHF 16000 This will give them the exact amount of Swiss francs needed to pay the obligation 2 To hedge this position using an investment in Swiss francs and a loan in euros the importer can borrow 1000000 EUR at the 6month interest rate of 3 and convert it into Swiss francs at the spot exchange rate of EURCHF 16000 They can then invest the Swiss francs at the 6month interest rate of 5 At the end of 6 months they will have the exact amount of Swiss francs needed to pay the obligation and they can convert it back to euros at the 6month forward exchange rate of EURCHF 16160 3 To hedge this position using a futures contract the importer can enter into a futures contract to sell 1000000 EUR at the 6month forward exchange rate of EURCHF 16160 This will lock in the exchange rate allowing the importer to know exactly how many Swiss francs they will receive at the end of 6 months to pay the obligation 4 To hedge this position using a currency option the importer can purchase a call option on Swiss francs with euros The call option has a strike price of EURCHF 16160 and the importer pays a premium of 002 EUR per Swiss franc ...
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Advanced Accounting
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
14th Edition
1260247821, 978-1260247824
