1. An importer of Swiss watches has an account payable of CHF700,000 due in 90 days. The following data is available:

Rates and prices in US-cents/CHF.

Spot rate: 71.42 cents/CHF

90-day forward rate: 71.14 cents/CHF

US dollar 90-day interest rate: 3.75% per year

Swiss franc 90-day interest rate: 5.33% per year

Option Data in $ cents/CHF

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Strike Call Put

70 2.55 1.42

72 1.55 2.40

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1. Assess the USD cost to the importer in 90 days if it uses a call option to hedge its CHF700,000 account payable. Use the call with a strike price of 72 cents/CHF. Be sure to include the call premium in calculating the cost of the account payable.

2. What will be the cost of the payable in 90 days if a forward contract is used?

c) By how much must the CHF weaken relative to the USD, from the current spot rate of 71.42 cents/CHF before the call option provides a lower cost than the forward hedge?